DEI in the FCA Crosshairs: Recent Developments Targeting Diversity-Related Employment Practices

Two recent developments in False Claims Act enforcement reflect the continued federal scrutiny of diversity, equity, and inclusion (DEI) initiatives and signal that federal contractors can expect increased enforcement activity targeting DEI initiatives. First, the government has been strengthening existing contract language, laying the groundwork for the United States to more easily pursue future False Claims Act (FCA) cases based on more explicit contractual terms related to DEI. Second, a recent settlement with IBM demonstrates early success from the government in extracting a pre-litigation settlement from one of its initial targets for DEI-related enforcement and could serve as a roadmap for future enforcement actions. Together, these developments are likely to embolden future enforcement efforts, from both the Department of Justice (DOJ) and private whistleblowers, and underscore the heightened legal and financial exposure facing federal contractors with DEI programs.

Key Takeaways:

• Future Anti-DEI Contract Clauses: On March 26, 2026, the Administration issued an Executive Order titled “Addressing DEI Discrimination By Federal Contractors,” requiring federal agencies to incorporate a new anti-DEI contract clause into all contracts and subcontracts, with violations expressly deemed “material” to payment decisions for FCA purposes.
• First FCA Resolution Under the Civil Rights Fraud Initiative: On April 10, 2026, DOJ announced its first FCA settlement under the Civil Rights Fraud Initiative covering conduct spanning January 1, 2019 to the present. IBM agreed to pay $17 million to resolve allegations that the company’s DEI-related employment practices violated anti-discrimination requirements in its federal contracts.
• Enforcement Actions Continue: Federal courts are issuing mixed rulings on challenges to DEI-related grant conditions, with some plaintiffs successfully obtaining preliminary injunctions, while others have been denied relief or had injunctions stayed on appeal.
• Ongoing Uncertainty: The legal landscape remains fluid, but the enforcement risk is becoming concrete, so organizations receiving federal funding should closely monitor developments in this rapidly evolving area.

Background

In January 2025, the Trump Administration published Executive Order 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity,¹ which required all federal agencies to include in every contract or grant two key terms: (1) a provision requiring contractors or grantees to agree that “compliance in all respects with all applicable Federal anti-discrimination laws is material to the government's payment decisions” for FCA purposes, and (2) a certification that the contractor or grantee does not operate any “programs promoting DEI that violate any applicable Federal anti-discrimination laws.”

In July 2025, former Attorney General Pam Bondi issued a memorandum titled Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination (Bondi Memo),² identifying “best practices” for grant recipients. The guidance warned that using race, sex, or other protected characteristics for employment, program participation, or resource allocation is unlawful except in rare cases satisfying judicial scrutiny. It also stated that facially neutral criteria such as “cultural competence,” “lived experience,” and geographic targeting that function as proxies for protected characteristics may violate federal law if designed or applied with intent to discriminate.

In late 2025, the Wall Street Journal reported that DOJ issued Civil Investigative Demands to several private sector companies regarding DEI-related practices, including Google and Verizon Communications.³

The March 2026 Executive Order: “Addressing DEI Discrimination By Federal Contractors”

On March 26, 2026, the Administration issued a new Executive Order imposing a mandatory contract clause that federal agencies must incorporate into contracts, subcontracts, and lower-tier subcontracts by April 25, 2026.⁴ Each agency head must report on compliance with the clause by July 24, 2026.

The mandatory clause requires six elements: (1) the contractor will not engage in “racially discriminatory DEI activities”; (2) the contractor will furnish all information and reports, including access to books, records, and accounts, as required by the contracting agency; (3) in the event of non-compliance, the contract may be canceled, terminated, or suspended, and the contractor may be declared ineligible for further government contracts; (4) the contractor will report subcontractors’ “known or reasonably knowable conduct” that may violate the clause; (5) the contractor will inform the contracting agency if a subcontractor sues the contractor challenging the validity of the clause; and (6) the contractor recognizes that compliance with the clause is “material” to the government’s payment decisions for FCA purposes.

The Executive Order defines “racially discriminatory DEI activities” broadly to mean “disparate treatment based on race or ethnicity in the recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or allocation or deployment of an entity's resources.” “Program participation” is also defined expansively to include membership or participation in training, mentoring, or leadership development programs; educational opportunities; clubs; associations; or similar opportunities sponsored by the contractor or subcontractor.

The Executive Order further directs the Director of the Office of Management and Budget, in coordination with the Attorney General, the Assistant to the President for Domestic Policy, and the Chairman of the Equal Employment Opportunity Commission to identify economic sectors that pose a particular risk of engaging in racially discriminatory DEI activities and to issue additional guidance regarding best practices to ensure compliance.

There are several key elements in this Executive Order that foreshadow increased enforcement activity in this space:

• The Order mandates that contractors expressly acknowledge compliance with the anti-DEI clause as “material” to the government’s payment decisions—a provision specifically designed to satisfy the materiality element of FCA liability and preemptively foreclose potential defenses. While the Supreme Court has held that the government’s decision to expressly identify a provision as a “condition of payment” is not dispositive, it is relevant to whether the government has established materiality, a critical element of FCA liability.
• The Order includes an expansive definition of “racially discriminatory DEI activities,” which encompasses disparate treatment in recruitment, employment, contracting, program participation, and resource allocation, potentially broadening the universe of contractor conduct that may now serve as a predicate for FCA claims. Additionally, this language is vague, providing a broad hook for private whistleblowers and government enforcers seeking to pursue claims. The mandatory reporting obligation requiring contractors to disclose subcontractors’ “known or reasonably knowable” arguably creates a diligence standard. Failing to uncover a subcontractor’s DEI activities could result in FCA liability—even if the contractor did not have actual knowledge of those activities.

The IBM Settlement: First Civil Rights Fraud Initiative Resolution

On April 10, 2026, Acting Attorney General Todd Blanche announced that 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.⁵ The settlement covers conduct from January 1, 2019 through the present, so the federal contracts at issue did not include the new DEI clauses addressed in the administration’s executive orders. Instead, the government alleged that IBM’s DEI programs violated pre-existing requirements by federal contractors to comply with anti-discrimination requirements set forth in Title VII of the Civil Rights Act of 1965 as incorporated into the Federal Acquisition Regulation at clause 52.222-26. The settlement is the first FCA resolution secured under the Civil Rights Fraud Initiative, which DOJ launched in May 2025.

The United States alleged that IBM engaged in the following practices and that the company allocated costs to its federal government contracts and sought payment and reimbursement under its federal government contracts for costs associated with these practices:

• Using a “diversity modifier” that tied bonus compensation to achieving demographic targets based on race, color, national origin, or sex.
• Altering interview eligibility criteria based on race or sex through the use of “diverse interview slates” and other related employment practices in connection with identifying “diverse” candidates for hiring, transfer, or promotion.
• Developing race and sex demographic goals for business units and taking race and sex into account when making employment decisions to achieve progress towards those demographic goals.
• Offering certain training, partnerships, mentoring, leadership development programs, and educational opportunities only to certain employees, with eligibility, participation, access, or admission limited on the basis of race or sex.

While IBM did not admit liability and expressly denied that it engaged in the alleged conduct, the government “acknowledged that IBM took significant steps entitling it to credit for cooperation with the government’s investigation,” including early disclosure of relevant facts, assistance in calculating damages and penalties, and voluntary remedial measures such as terminating and/or modifying various programs and practices at issue. Publicly disclosed information did not describe the contracts at issue or how damages and penalties were ultimately calculated, so there is little information to answer many of the unresolved questions about DOJ’s theory of FCA liability for DEI activities, including how damages would be calculated when the United States received the benefit of its bargain or how engaging in DEI activities is material to the underlying contract.

While the government’s recent executive orders and any agency contract provisions that follow from those orders may be challenged in litigation, the IBM investigation and settlement demonstrate that potential FCA enforcement risk exists under current anti-discrimination laws, even prior to the March Executive Order. Even without new contractual provisions drawing a clearer line between DEI programs and materiality under the FCA, some businesses may choose to resolve claims rather than bear the expense and difficulty of protracted investigation or litigation. These settlements will provide roadmaps to DOJ and private whistleblowers seeking to bring similar actions.

Implications for Federal Contractors

These developments indicate an increased risk of FCA enforcement for organizations that receive federal funding and maintain DEI initiatives.

False Claims Act Exposure Is Now a Reality: The IBM settlement proves that at least one company is willing to settle DEI FCA claims for a significant dollar amount. This will likely encourage further efforts from DOJ and inspire private whistleblowers to find similar theories of noncompliance to bring suit over.

Clearer FCA Hooks for DEI Activities: The new executive order presents several clear hooks for FCA liability for government contractors who engage in DEI activities or contract with those who do. Contractors should anticipate that the federal government intends to leverage these hooks in future DEI enforcement actions and consider efforts to assess current FCA risks.

Cooperation Credit Matters: The IBM settlement indicates that DOJ may provide credit for early cooperation, disclosure of relevant facts, and voluntary remedial measures. Organizations under investigation should consider these factors but also note that proactive disclosure does not guarantee a favorable outcome.

¹ 90 Fed. Reg. 8633 (Jan. 21, 2025).
² Memorandum from Pam Bondi, Attorney General, Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination, DOJ, 2, 3, 5, and 7 (July 29, 2025) available https://www.justice.gov/ag/media/1409486/dl?inline=&utm_medium=email&utm_source=govdelivery.
³ https://www.wsj.com/politics/policy/trump-doj-dei-fraud-investigations-93213d52.
⁴ 91 Fed. Reg. 16147.
⁵ Press Release, IBM Pays $17 Million to Resolve Allegations of Discrimination Through Illegal DEI Practices, DOJ (Apr. 10, 2026) available https://www.justice.gov/opa/pr/ibm-pays-17-million-resolve-allegations-discrimination-through-illegal-dei-practices.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Amanda M. Santella, an O’Melveny partner licensed to practice law in the District of Columbia and Maryland; Tristan Morales, an O'Melveny partner licensed to practice law in the District of Columbia and California; Anne Steinberg, an O'Melveny partner licensed to practice law in California; Natasha W. Teleanu, an O’Melveny partner licensed to practice law in New York;  Elizabeth Arias, an O’Melveny counsel licensed to practice law in California; Hannah E. Dunham, an O'Melveny counsel licensed to practice law in California and the District of Columbia; and Joshua Goode, an O’Melveny associate licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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