As previously discussed by members of our Government Contracts Practice, federal contractors and subcontractors face new enforcement risks created by the current regulatory framework that actively targets diversity, equity, and inclusion (DEI) programs.

Executive Order 14398 and its implementing clause, RFO 52.222-90, prohibit unlawful “racially discriminatory DEI activities” in federal contracting. See RFO 52.222-90(b)(1). The FAR Council directed contracting officers to “make every effort” to incorporate the clause into all existing contracts via bilateral modifications by July 24, 2026. That deadline has passed, and the vast majority of federal contractors and subcontractors are now subject to the clause’s requirements.

This follow-up update provides government contractors and in-house counsel with a high-level overview of the target areas for Government enforcement action, remedies available to the Government, including the False Claims Act (FCA), and defenses that a target could invoke.

Target Areas for Government Enforcement

Contractors should gain a better understanding of the specific activities, programs, and funding arrangements that are most vulnerable to government enforcement in this environment. Under DOJ’s Civil Rights Fraud Initiative, investigations focus primarily on certain diversity programs that directly influence employment practices.

Specifically, the DOJ and agency OIGs are targeting:

  • Goal-Setting and Compensation-Tied Metrics: At the February 2026 False Claims Act conference, Deputy Assistant Attorney General Brenna Jenny clarified that DOJ targets companies that implement programs that pressure supervisors to make hiring and promotion decisions based on race or ethnicity. This includes setting demographic hiring goals and tying executive compensation or performance reviews to diversity metrics.
  • Racially-Targeted Benefits or Opportunities: Scholarships, fellowships, internships, or leadership tracks that exclude candidates based on race are primary targets. July 2025  guidance from the U.S. Attorney General specifically stated that race-exclusive scholarships, internships, programs, resources, or leadership initiatives violate federal civil rights laws. See Office of the Attorney General, “Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination,” at 4 (July 29, 2025). EO 14398 creates an FCA nexus for these activities to the contractor’s expenditure or allocation of funds.
  • Discriminatory Training: Training materials that stereotype or discuss group privilege may be discriminatory. Furthermore, anti-discrimination training programs cannot require employees to confess personal biases or affirm ideological positions as an implied condition of employment.
  • Supplier Diversity Preferences: Using race or ethnicity as a factor or criterion in vendor selection is a violation of RFO 52.222-90. Whether consideration of race or ethnicity is dispositive in making vendor selection is immaterial. Critically, EO 14398 and its implementation guidance provide no de minimis exception.

Enforcement Remedies Contractor Defenses

With EO 14398, RFO 52.222-90, and the new causes for debarment added to FAR 9.406-2 (“Causes for debarment”), the Government now possesses a broad range of contractual, administrative, and civil remedies in its campaign to combat “illegal DEI.” Now more than ever, contractors must understand these powerful remedies and the corresponding legal defenses.

Contractual and Administrative Remedies

Under Paragraph 3 of RFO 52.222-90, noncompliance can result in contract cancellation, termination, or temporary suspension of work and funding. Additionally, the FAR Council updated FAR 9.406-2(b)(1)(viii) to make failure to comply with RFO 52.222-90 an enumerated cause for debarment.

Debarment can present an existential threat to contractors. A skillful challenge to a debarment action will, more often than not, ultimately succeed in defeating an agency exclusion. However, the immediate reputational and financial impact should inform any compliance strategy.

The False Claims Act and Legal Defenses

Notably, EO 14398 and the implementing RFO provision establish that violations may result in FCA liability for federal contractors. The DOJ has demonstrated its intent to enforce these priorities, as seen in its $17 million settlement with IBM in April 2026, where Acting Attorney General Todd Blanche warned that contractors cannot evade the law by repackaging racial discrimination as DEI.

Under RFO 52.222-90, the Government attempts to have contractors stipulate to a legal element of proof by having contractors to acknowledge that compliance is material to the Government’s payment decisions under the False Claims Act. However, in Universal Health Services v. United States ex rel. Escobar, the Supreme Court held that merely labeling a contractual provision as a condition of payment is not dispositive of materiality. 579 U.S. 176, 190 (2016). Courts must still perform a rigorous inquiry into whether the violation actually would influence the Government’s payment behavior.

While the Government may be hamstrung due to its argument in the prior NADOHE litigation that “[a]ny good-faith uncertainty” regarding anti-DEI obligations constitutes a “complete defense” to a FCA action, this concession should not be viewed as a safe harbor. See Nat’l Ass’n of Diversity Officers in Higher Ed. v. Trump, No. 25-1189 (4th Cir. May 29, 2025), Reply Brief for Appellants, at 30.Cases are litigated on their own merits and DOJ’s concession in NADOHE does not purport to create a universal defense to an FCA action. Furthermore, agencies’ increasing use of the Administrative False Claims Act (AFCA) greatly expands Government enforcement capabilities. Federal agencies now possess the latitude and independent discretion to pursue violations of RFO 52.222-90 and EO 14398 in conjunction with debarment, thus bypassing federal courts and formal DOJ participation.

FCA Enforcement and Pending Litigation

On April 20, 2026, NADOHE filed its second action in the Maryland federal district court challenging EO 14398 itself as unlawful See Nat’l Ass’n of Diversity Officers in Higher Ed. v. Trump (“NADOHE II”), No. 8:26-cv-01532, Complaint at ¶¶ 168-214 (D. Md. Apr. 20, 2026). The plaintiffs amended their complaint on May 22, 2026, now asserting seven claims against the federal government. See NADOHE II, Amended Complaint (Dkt. No. 26) at ¶¶ 189-275 (D. Md. May 22, 2026).

Importantly, Count III argues that the FCA provision in EO 14398 is ultra vires,  an unlawful overreach  of executive power. NADHOE Am. Compl., at ¶ 231. The plaintiffs assert that no “close nexus” exists between the FCA provision and the Procurement Act and that EO 14398 does not provide any factual findings in support of this nexus or explanation as to how FCA liability would promote contracting efficiency or insulate the government from costs associated with prohibited “racially discriminatory DEI activities.” Id., at ¶¶  232-3. The NADOHE plaintiffs have further pressed their case by seeking a preliminary injunction and stay under Section 705 of the Administrative Procedure Act. See NADOHE II, Memorandum of Law in Support of Plaintiff’s Motion for a Preliminary Injunction and 5 U.S.C. § 705 Stay (Dkt. No. 28-1) (June 4, 2026). The court has not yet ruled on the motion.

At the same time, the multi-state litigation State of Maryland v. Hegseth is likewise actively challenging the procedural validity and clarity of EO 14398 under the Administrative Procedure Act. See Case No. 1:26-CV-02322 (D. Md. 2026). Nevertheless, federal contractors cannot afford to take a wait-and-see approach. Now that the July 24th deadline has passed, failing to act proactively risks becoming an enforcement target and incurring financial and reputational harm. Contractors and in-house counsel should act now to review and restructure their recruitment, training, and supplier programs, ensuring all initiatives are firmly aligned with changing federal requirements.

What Contractors Must Do Now

The Government has installed the full range of contractual, administrative, and civil remedies to end “illegal DEI” practices. As federal agencies move into the enforcement phase in its implementation of EO 14398, documented program restructuring and proactive internal corporate and subcontractor and supplier monitoring are essential to mitigate risk exposure.