The Trump Administration’s DEI Executive Order Creates Enforcement Risk but May Not Be the False Claims Act Bombshell It’s Made Out To Be

Following the January 21, 2025 issuance of the Executive Order, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” (EO), advisories flooded the legal airwaves warning of the extreme False Claims Act (FCA) risk posed to contractors that maintain “DEI” (diversity, equity, and inclusion) programs. Always the contrarians, we at Qui Notes suggest that while the EO signals DEI-related FCA enforcement by the new administration and creates new targets for would-be relators, the EO may not wind up being the FCA disaster some have predicted.

First, let’s briefly review the EO, which rescinds a series of decades-old executive orders (including one dating back to Lyndon B. Johnson’s administration) relating to affirmative action and DEI. In their place, the EO directs agency heads to implement the administration’s new “anti-discrimination” policy through the federal contracting process. (For more details, see our prior Advisory, which provides a comprehensive summary of the EO.) Citing the FCA, the EO also appears to contemplate relying on that statute to police contractor DEI programs. Specifically, the EO requires that “[t]he head of each agency shall include in every contract or grant award: (A) 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 [the FCA]; and (B) 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.” (emphases added).

Although these statements clearly point to possible future FCA enforcement, their immediate effect is far from clear.

What Is the Immediate Effect of the EO?

The short answer is “none.” First, the EO includes a 90-day grace period for contractors, which gives them until April 21, 2025 to carefully consider the EO’s ramifications to assess whether any changes to their existing programs are appropriate.

Even after the grace period expires, however, the EO contemplates the need for further agency action to implement the policy changes. Indeed, the EO does not purport to unilaterally modify existing government contracts, and it would present serious legal questions were it to try. Rather, the EO directs executive departments and agencies to take certain future actions to impose obligations on contractors. For existing contracts, unless and until modified to implement the EO (or absent some other binding direction from a Contracting Officer), the current contractual terms remain in place.

In addition, although the EO revokes prior EOs that required contractors to take affirmative action to ensure equal opportunities, the revocations also are not self-executing. Agencies implemented those prior executive orders through regulations adopted after notice-and-comment rulemaking, including through the Federal Acquisition Regulation (FAR). Generally speaking, any significant revisions, including amendments or rescissions, to FAR clauses are subject to notice-and-comment procedures as well. See FAR 1.501-2; 41 U.S.C. § 1707. The FAR defines a “significant revision” as one that alters the substantive meaning of any coverage in the FAR system and has significant cost or administrative impact on contractors, or significant effect beyond the internal operating procedures of the issuing agency. FAR 1.501-1. As a result, it is likely that any FAR changes to implement the EO — which contemplates a concession-of-materiality clause and a certification — would require action by the FAR Council through the notice-and-comment rulemaking process prescribed by the Administrative Procedure Act.¹ That said, there is the potential for more immediate action through the interim final rule process, recently invoked, for example, to implement the TikTok ban in FAR 52.204-27.

Substantive FAR revisions, however, do not happen overnight and are unlikely to be finished by April 21, 2025. Thus, even after that date, contractors will likely continue to be bound by the existing terms in their contracts, even though those terms may not reflect the policies outlined in the EO. That places contractors in a tough spot: comply with existing contract terms that are contrary to the EO or disregard the existing terms that mandate certain actions and requirements the EO purports to eliminate. Take, for example, FAR 52.222-26 (Equal Opportunity), which required contractors to follow certain provisions of a now-rescinded EO related to affirmative action. Despite its tension with President Trump’s DEI EO, that clause will remain in government contracts unless and until removed by formal contracting action.

If contractors elect to continue complying with such existing contract terms, they may become enforcement targets for DOJ and relators. Indeed, on February 5, 2025, the freshly sworn-in Attorney General issued a memo directing DOJ to enforce the Trump administration’s DEI policies, stating that the department will investigate and potentially pursue civil and criminal enforcement related to “illegal DEI and DEIA preferences, mandates, policies, programs and activities in the private sector and in educational institutions that receive federal funds.”

That said, in the absence of any subsequent legislative or formal contracting action, contractors that follow their existing contracts should have reasonable defenses to a FCA enforcement action based on a failure to follow the EO. After all, to establish a FCA violation, the government or a relator must prove a false claim, which, in this context, would likely be an impliedly false claim, that is, that the contractor failed to disclose its noncompliance with the EO when billing the government. But, as noted above, the EO is not self-executing; its application to contractors requires further agency action. It seems to us that the government or a relator would be hard-pressed to prove noncompliance with law, regulation, or contract based on the EO alone.

For contractors considering changing their current programs, some agencies have started to issue guidance indicating that they may not enforce existing DEI-related contract terms. For example, on January 23, 2025, the Acting Administrator of the General Services Administration (GSA) issued a memorandum stating that GSA “intends to take immediate action to begin forbearing enforcement of all contract clauses, provisions, terms, and conditions, related to … DEI.” The memorandum, however, clarified that it was not directing contractors to take any immediate action and the agency would provide additional guidance. This suggests that the GSA would not enforce existing DEI requirements — and, at the same time, would not prohibit contractors from adhering to such requirements. Of course, as discussed above, formal guidance would be required to flesh this out — and, as we know, following Loper Bright, an agency’s “guidance” may not cut it if contrary to the plain terms of a law or regulation.

How Does the EO Affect FCA Materiality?

The EO requires the head of each agency to include in contracts “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 the FCA. In other words, this provision appears designed to facilitate enforcement by squarely addressing whether these new requirements are material — an essential element of FCA claims. But there are real questions about the legal viability of that approach. Can the government effectively establish FCA materiality by contract? We think there are good arguments that it cannot. Escobar cautioned that “the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive,” in the FCA materiality analysis. The court explained that the government’s actual behavior is what matters. For example, if the government continues to pay a particular claim in full, despite knowing that certain contract requirements were ignored or violated, that would be “very strong evidence” that the requirements were not material. Thus, even if the contract states that compliance with applicable federal anti-discrimination laws is material, courts likely will still have to assess whether that is true for that particular agency on a case-by-case basis.

Will Contractors Have To Submit a “DEI” Certification and What FCA Risks Does That Present?

The EO also directs agency heads to include in contracts “a term requiring [each] counterparty or recipient to certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.” Although any certification of compliance should rightly sound the FCA alarm, the EO leaves open many questions about its scope and ramifications.

For starters, what will the certification (assuming the agency adopts and incorporates it into a contract) actually say? If it adopts the language of the EO — that the contractor “does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws” — contractors may well have an argument that they believed the certification to be true: that they were not “operating programs promoting DEI” and that they certainly didn’t believe that any such efforts violated the law. Because the FCA’s scienter element focuses on a defendant’s subjective beliefs, an honestly held, good faith belief in a certification’s truthfulness is a strong defense to liability. Further, many circuits have held that the FCA requires “an objective falsehood” and that differences in interpretation growing out of a disputed legal question are not false under the FCA. The EO refers to “[i]llegal DEI and DEIA policies” (emphasis added) that violate federal civil rights laws, but the EO does not identify what types of DEI programs would be deemed “illegal.” And the litigation following the Supreme Court’s decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023) — which emphasized that the explicit use of race as an independent factor in university admissions is ordinarily prohibited — shows that there is ample ambiguity about what makes a DEI program “illegal.” Those ambiguities should present serious challenges for the government and FCA relators in proving falsity and knowledge — that is, that the program at issue was “illegal” and that the contractor knew as much (or was at least reckless or deliberately indifferent).

In the meantime, until further formal agency action implementing the EO, contractors with DEI programs should carefully review existing policies, practices, training materials, and programs to ensure compliance with anti-discrimination laws — a step we suspect most contractors took before they implemented the programs in the first place. A “second look” in light of the EO, though, certainly couldn’t hurt.

If and when contractors are required to submit an “anti-discrimination” certification, they would be wise to establish careful internal controls relating to any such certification (much in the same way, for example, that contractors certify current cost and pricing data in applicable contracts).

Takeaways

The enforcement landscape is changing rapidly, with new executive orders issued frequently, and much litigation (outside of the FCA context) as to their validity and legal effect. The uncertainty facing contractors is real: until there is further agency action implementing its terms, the EO poses more questions than it answers and does not, in and of itself, change any existing laws, regulations, or contractual terms. At least in the short term, its potential as a basis for robust FCA enforcement is questionable.

We at Qui Notes will continue to monitor, and will update our readers as these and other issues of FCA interest unfold.

© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.