The False Claims Act and President Trump’s DEI Executive Order: Federal Contractor Employers Must Take Notice

In the wake of President Trump’s “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” Executive Order (the “Executive Order”) (discussed further here), many companies are in the process of revisiting their existing diversity, equity, and inclusion (“DEI”) programs and initiatives to reconfirm their legal viability.  Close examination of the Executive Order reveals that the Administration hopes to rely on the False Claims Act (“FCA”) as another statutory weapon aimed at eliminating what it perceives as a scourge of “illegal,” “demean[ing],” and “immoral” DEI programs.  The False Claims Act, 31 U.S.C. §3729, is a whistleblower statute intended to prevent companies from defrauding the government.  Its inclusion in the Executive Order opens federal contractors and federal grant recipients to the possibility of substantial criminal and/or civil liability where they operate DEI programs deemed to violate the law.  We discuss the FCA and its impact under the Executive Order more below. 

The False Claims Act

The FCA serves as the primary mechanism by which the federal government combats fraud in government programs, imposing potential substantial penalties where companies materially fail to comply with statutory, regulatory, or contractual requirements or otherwise knowingly submit false claims for payment.  Like all fraud claims, the requirements to allege an FCA claim are subject to heightened pleading standards, but because of the lengthy statute of limitations associated with FCA claims (the later of either: (i) six years from the date of the alleged fraud or (ii) three years from when the government learned of the fraud), companies must continually review their practices to ensure compliance.  The FCA imposes mandatory treble damages on those found liable for violations, with penalties ranging up to $27,894 per claim, which has led the DOJ to reportedly recover more than $2.9 billion in FCA settlements and judgments in 2024 alone. You can read more about last year’s FCA case activity here.

Unlike certain other federal laws, however, the FCA also permits private parties, or relators, to file qui tam actions on behalf of the government in exchange for a share of the recovery – up to 30 percent of potential multimillion-dollar recoveries.  In making these allegations, the relator must be the government’s “original source” of information, usually requiring them to identify non-public, original information about the alleged fraud.  Crucially, no “special relationship” between the parties is required.  Put simply, anyone with non-public information of alleged fraudulent activity has the potential to assert an FCA claim against a company.  Further, even if the government opts not to intervene on the relator’s behalf and pursue the alleged violation, the relator can still prosecute the claim and, if successful, receive a larger share of any recovery.  

The damages do not stop there; the FCA not only provides for corporate liability but individual liability as well, exposing corporate officers to the potential for personal fines and even criminal penalties in some instances. 

The Executive Order’s Potential Impact on FCA Cases Going Forward 

The Executive Order widens the path for the Department of Justice or potential qui tam relators to assert FCA claims related to unlawful DEI practices (and other discriminatory practices that go beyond just DEI programs), under a false certification theory. A claim is “fraudulent,” for FCA purposes, if the contractor falsely certifies that it is in compliance with certain federal requirements when, in fact, it is not.  The contractor’s false certification must also be “material” to the government’s decision to pay the claim.  Although federal contracts already require compliance with the anti-discrimination laws, the Executive Order rescinds certain existing executive orders and agency guidance, and, in their place, mandates that every new federal contract or federal grant include two terms:

1. A term requiring the contractual counterparty or grant recipient to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code; and
2. A term requiring such counterparty or recipient to certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.

Yet, questions remain regarding the practical impact of the Administration’s decision to reference the FCA in the Executive Order.  On the one hand, the U.S. Supreme Court confirmed in Universal Health Servs. v. United States ex rel. Escobar that materiality is a “demanding” standard and cannot be met simply because the federal government says that a provision in a federal contract or grant is material, though it is a relevant factor to consider when determining whether an FCA violation has occurred.  579 U.S. 176, 194 (2016).  This decision suggests that the Administration’s declaration of  “materiality” is not dispositive.  On the other hand, the Executive Order still is likely to invite internal and external scrutiny – even if ultimately unsuccessful – into a company’s DEI practices and the potential for a significant financial recovery may spawn a flurry of FCA claims, founded and unfounded. 

Indeed, the Executive Order’s empowering of private parties to enforce the Administration’s vision of a meritocracy has broader implications including:

• Emboldening employees of federal contractors or grant recipients whose views on DEI differ from their employer’s views to file FCA claims on the grounds of alleged non-compliance with the new contractual term or certification. 
• Incentivizing employees to assert discrimination claims while tacking on a separate FCA claim. 
• Inspiring activist non-employees to report to the DOJ that a company’s DEI practices violate the law in hopes of spurring an investigation (though here, there is little likelihood of personal financial recovery if they do not have non-public original information). 

What’s A Contractor to Do?

These very real concerns provide further justification to federal contractors or grant recipients to take a much closer look at their DEI programs or practices (and all anti-discrimination policies and procedures) as soon as possible to ensure compliance, and to allow individuals to more comfortably make the required certification in new federal contracts and grants or modifications to existing contracts or grants. 

And these concerns are amplified even further by the fact that many employers continue to operate in the dark, as the Executive Order did not provide any clarity on what DEI practices are “illegal.”  The Executive Order did preview, however, that more information would be forthcoming, but until then, and even after such information is released given expected legal challenges, federal contractors and grant recipients should pay close attention to parsing out compliant DEI practices.

At the same time, the paradigm shift goes well beyond federal contractors and grant recipients; it’s impact is being felt by all employers, which we wrote about at length here, with new developments every day.  For example, newly-confirmed Attorney General Pamela Bondi issued a memorandum, dated February 5, 2025, announcing that the Department of Justice will target, for criminal investigation, private sector DEI initiatives.  These enforcement priorities and the resulting uncertainty will loom for some time before either the Administration or the court system provide the necessary additional clarity.  The Mintz employment and government investigations teams are monitoring these issues and will continue to provide pertinent updates as they evolve. 

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