Navigating the Risks: How the Trump Administration’s DEI Executive Order Could Expose Your Organization to False Claims Act Liability

Takeaways

• • The Trump administration’s DEI executive order could expose organizations with DEI programs to False Claims Act liability, significantly impacting those receiving federal funds.
  • The executive order requires government contracts to include provisions stating that compliance with federal anti-discrimination law is material for purposes of the False Claims Act.
  • The real-world impact of the executive order lies in the pressure it creates to settle any FCA claim based on an illegal DEI program, regardless of its merit.

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One of the Trump administration’s most talked about executive orders targets private sector DEI programs. Among its litany of enforcement tools and methods designed to encourage the private sector to end DEI programs, two seemingly technical provisions may have the widest impact. These provisions expose all entities that have DEI programs and receive federal money to potential liability under the False Claims Act. If the Order withstands legal challenges, the Trump administration may have unleashed the powerful animal that is the FCA—with its treble damages, civil penalties, and generous bounties to whistleblowers—on companies of all sizes that receive federal money directly or indirectly. This includes all healthcare providers, universities, and other private employers that are government contractors or grant recipients.

The DEI executive order, titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” is divided into two sections, one focused on “Terminating Illegal Discrimination in the Federal Government” and the other on “Encouraging the Private Sector to End Illegal DEI Discrimination and Preferences.” Although the most publicized aspects of the “Federal Government” section focus on ending DEI programs throughout the federal workforce, two provisions in this section could have the most significant effect on the private sector:

The 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 section 3729(b)(4) of title 31, United States Code; 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.

Once incorporated into federal contracts, these provisions could expose companies and other entities receiving federal funds to FCA liability for every request for payment they submit while they continue to operate DEI programs that a judge or jury might later deem illegal. Without minimizing other legal risks, those under the FCA are the focus of this alert.

On that point, what exactly is the significance of the contractual provision deeming compliance with anti-discrimination law “material” for purposes of the FCA? All FCA claims have what the Supreme Court has called a “robust” materiality requirement. Universal Health Servs v. United States ex rel. Escobar, 579 U.S. 176, 194 (2016). Materiality is statutorily defined as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” 31 USC § 3729(b)(4). The mere fact that a government contract states that compliance with anti-discrimination law is “material” does not ipso facto establish materiality. At a minimum, these new provisions will make it substantially more difficult to get an FCA claim targeting a DEI program dismissed at the pleadings stage or at summary judgment.

The real-world impact of this Order lies in the pressure it creates to settle any FCA claim based on an illegal DEI program, regardless of its merit (as to materiality). The FCA is notorious for its harsh remedies, including mandatory treble damages, attorneys’ fees, and steep civil penalties per false claim (currently ranging from $13,946 - $27,894 per claim). For entities that submit a substantial number of small claims for payment—such as healthcare providers billing Medicare and Medicaid—it is the per-claim penalties that can lead to staggering damages calculations and settlement demands. Unlike standard FCA cases against healthcare providers, which are often limited to a particular provider, procedure, or billing practice, an FCA claim based on a DEI program has no such limits. For example, consider a provider that operates a DEI program for a year. If sued under the FCA, the provider could face a damages calculation of three times the value of all its Medicare and Medicaid reimbursements for the entire year (treble damages), plus at least $14,000 in civil penalties per claim. This level of financial exposure could be catastrophic to companies of nearly any size—an extremely effective tool to force settlement.

However, the most perilous part of the Order for private sector DEI programs may derive from the FCA’s qui tam provisions, which incentivize suits by private plaintiffs on behalf of the United States. Under these provisions, whistleblowers (in FCA speak, “relators”) are entitled to 15-30% of the government’s recovery. There are plenty of individual actors and groups that may be motivated to bring FCA claims targeting DEI programs:

• • Companies regularly face “reverse discrimination” complaints and lawsuits alleging bias against majority groups (e.g., white male plaintiffs). The Order could transform many of those matters into potentially bet-the-company FCA cases. And if the Supreme Court lowers the standard for reverse discrimination claims under Title VII (case scheduled for oral argument this month), that might further encourage the plaintiffs’ employment bar to bring more “reverse discrimination” cases.
  • The Order directs federal agencies to identify “[l]itigation that would be potentially appropriate for… intervention or statements of interest.” For the FCA relators’ bar, this is a strong signal to bring FCA claims against companies with DEI programs. Government intervention is often the best possible outcome for a relator; it transfers litigation costs to the government while guaranteeing the relator a minimum 15% share of the recovery. This incentive will likely spur a rise in FCA lawsuits targeting DEI programs—even in the absence of underlying employment discrimination claims.
  • Conservative public interest law firms have already brought anti-discrimination lawsuits challenging DEI policies. See, e.g., Students for Fair Admissions v. Harvard; Faculty, Alumni, & Students Opposed to Racial Preferences v. Northwestern. FCA claims provide these organizations with a new avenue to pursue legal action against private sector employers that receive federal funds.

While the Trump administration has already indicated that it will focus its enforcement efforts on the most prominent targets, these changes to the law empower private litigants to cast a much wider enforcement net (that is, unless the Supreme Court declares the FCA’s entire qui tam system unconstitutional, a possibility Dykema recently explored).

Recent preemptive actions by many entities dismantling their DEI programs do not provide a safe harbor. The Order is not limited to DEI programs or discrimination against majority groups—it mandates “compliance in all respects with all applicable Federal anti-discrimination laws.” So plaintiffs asserting standard discrimination claims based on any protected classification such as race, gender, disability, or age may graft on an FCA claim as well. If courts allow these creative FCA claims to survive motions to dismiss, the FCA could become a supplemental weapon in employment discrimination litigation against employers receiving federal money.

As Dykema recently highlighted on its Labor and Employment Law Blog, now is the time for companies and other employers to carefully evaluate their DEI programs given this Order and the rapidly changing legal landscape and seek the advice of counsel about mitigating legal exposure and litigation risk.

If you have any questions about the information in this alert, please contact Jennifer Beidel, Robert Boonin, Mark Chutkow, Chantel Febus, Jonathan Feld, Andrew VanEgmond, or your relationship attorney.