States Sue to Block Agencies from Adding Anti-DEI Clauses to Government Contracts
On June 10, 2026, nineteen states and the District of Columbia filed suit in the District of Maryland seeking to halt implementation of Executive Order 14398, which was issued on March 26, 2026. The order requires federal agencies to insert a mandatory contract clause into all contracts, subcontracts, and “contract-like instruments” prohibiting contractors from engaging in “racially discriminatory DEI activities.” Compliance with the new clause is an express condition of eligibility to contract with the federal government, and consequences for noncompliance specifically include contract cancellation, exclusion from future federal contracts, suspension, and False Claims Act (FCA) liability. Filed as Maryland v. Hegseth, the complaint comes just two months after the administration announced its first False Claims Act resolution under the Civil Rights Fraud Initiative, a $17 million settlement with IBM.
The IBM Settlement
In April, IBM agreed to pay $17,077,043 to resolve allegations that it violated the FCA by failing to comply with anti-discrimination requirements in its federal contracts that existed long before the recent EO requiring the additional terms. The government alleged that IBM tied bonuses to demographic targets, altered interview criteria based on race or sex through “diverse interview slates,” and limited access to training, leadership development, and mentoring programs with eligibility based on race or sex. IBM received credit for cooperating with the government’s investigation through its early disclosures and voluntary remediation. Notably, in the settlement agreement IBM expressly denied the factual allegations.
Executive Order 14398
EO 14398, “Addressing DEI Discrimination by Federal Contractors,” defines “racially discriminatory DEI activities” as “disparate treatment based on race or ethnicity” in recruitment, employment, contracting, program participation, or resource allocation, and directs all federal agencies to insert a contract clause prohibiting such activity into new and existing federal contracts. The clause includes a statement that the contractor recognizes that compliance is material to the government’s payment decisions under the FCA.
Pursuant to the EO, the Federal Acquisition Regulatory (FAR) Council’s April 17, 2026 memorandum implements the EO by issuing model deviations to the FAR, along with guidance that to comply with the EO, agencies must begin using the new model deviation clause at FAR 52.222-90 by April 24 and modify existing contracts to include the clause by July 24, 2026.
The States’ Case
The complaint brings claims under the Administrative Procedure Act. The states argue that the agencies’ implementing actions exceeded the FAR Council’s authority and violated the statutory notice-and-comment process required by federal procurement policy. They further contend that the agencies’ actions are arbitrary and capricious because the EO’s prohibitions are too vague to enforce, and the agencies did not adequately explain the policy change. The new contract terms muddy the waters, in turn increasing compliance costs and disrupting federal contractors’ efforts to prevent or remedy other incidents of unlawful racial discrimination.
The complaint also challenges the FCA materiality clause in the new contract language as “contrary to law.” Citing the Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 780 F.3d 504 (2016), the states argue that materiality under the FCA is a factual inquiry that “depends ultimately on the ‘effect on the likely or actual behavior of the recipient of [an] alleged misrepresentation.’” Thus, they contend, merely labeling a contract clause material is insufficient to make it so for purposes of contractor liability under the FCA.
According to the states, federal contractors and subcontractors are exposed to FCA liability for noncompliance with a contract clause that has not been lawfully adopted. As contractors work to comply with EO 14398, the suit raises the possibility of court intervention before the July 24 deadline for bilateral modifications to existing contracts.
The Bottom Line
While the results of this case may decide whether the new DEI clauses in federal contracts will be required, the IBM settlement demonstrates DOJ’s efforts to pursue DEI-based FCA investigations even with the current federal contracting language. The new EO and statements by DOJ officials, such as those of Brenna Jenny at the Federal Bar Association’s annual Qui Tam Conference in February, leave little doubt that investigation of contractors for violations of antidiscrimination laws is one of the government’s top enforcement priorities.
We at Bradley will continue to monitor the suit and update Eye on Enforcement readers with subsequent developments.
Source(s):
States Sue to Block Agencies from Adding Anti-DEI Clauses to Government Contracts | JD Supra. (2026). JD Supra. https://www.jdsupra.com/legalnews/states-sue-to-block-agencies-from-4062285/