Overview

The Trump Administration’s stated intent to use federal contracts and the False Claims Act (FCA) to target discriminatory hiring and employment practices is quickly becoming a reality. On March 26, 2026, President Trump issued an Executive Order (EO) focused squarely on federal contractors and subcontractors, titled “Addressing DEI Discrimination by Federal Contractors.” And on April 10, 2026, the Department of Justice (DOJ) announced a $17 million settlement with IBM resolving claims under the FCA, which allows the federal Government or whistleblowers on its behalf to seek treble damages and statutory penalties for fraudulent payment claims to the Government. The settlement resolved allegations that IBM, which had undertaken Government contracts, engaged in discriminatory employment practices and then allocated costs associated with those practices to the federal contracts and sought payment or reimbursement for the costs.

The combined message of the IBM settlement and EO 14398 is clear: the federal Government is ramping up enforcement against federal contractors and subcontractors that engage in “racially discriminatory DEI activities.” The settlement is the first FCA settlement under the Civil Rights Fraud Initiative announced by the administration in May 2025. (See our prior alert discussing the initiative.)

New EO-Imposed Contract Requirements

The EO mandates that federal executive departments and agencies include a new clause in federal contracts, contract-like instruments,¹ and subcontracts at every level that imposes new requirements on federal contractors and subcontractors. The clause includes six parts:

• The contractor will not engage in any racially discriminatory DEI activities, as defined in section 2 of the EO.
• The contractor will furnish all information and reports, including providing access to books, records, and accounts, for purposes of ascertaining compliance with the clause.
• In the event of the contractor’s or a subcontractor’s noncompliance with the clause, the federal Government may cancel, terminate, or suspend the contract in whole or in part, and the contractor or subcontractor may be declared ineligible for further Government contracts.
• The contractor must report any subcontractor’s known or reasonably knowable conduct that may violate the clause to the contracting department or agency and take any appropriate remedial actions against the subcontractor as directed by the contracting department or agency.
• The contractor must inform the contracting department or agency if a subcontractor sues the contractor and the suit puts at issue, in any way, the validity of the clause.
• The contractor must represent that it recognizes that compliance with the requirements of the clause is material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act).

At its core, the new clause is akin to a contractual affirmation, requiring contractors and subcontractors, through flow-down provisions, to agree that they will not engage in racially discriminatory activities and will provide records to the agency that establish compliance with the clause. This EO defines “racially discriminatory DEI activities” as “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.”² The EO also includes a new definition of “program participation” for DEI as “membership or participation in, or access or admission to: training, mentoring, or leadership development programs; educational opportunities; clubs; associations; or similar opportunities that are sponsored or established by the contractor or subcontractor.”

In addition, the inclusion of “contracting” and “program participation” in the EO’s definition of “racially discriminatory DEI activities” raises questions regarding whether the EO is intended to impact small business subcontracting or other vendor preference arrangements (such as minority and disadvantaged business subcontracting) or other small business mentoring programs. Since those programs are based on statutes, it is unlikely that they can be repealed by an EO, leaving this as a yet-to-be-resolved issue for contracting agencies or enforcement authorities.³

Finally, it is important to emphasize that the clause imposes a harsh penalty for noncompliance through suspension, cancellation, termination, and even debarment of the contract award, and also subjects federal contractors and subcontractors to potential federal audits seeking to determine compliance with the new clause. This could impose a significant burden even for contractors that are found to be compliant.

Perhaps most notably, the EO also directs the Attorney General to consider bringing FCA actions against contractors and subcontractors. Although not unexpected, this a novel application of the FCA, but one that should be a concern for federal contractors and subcontractors, as discussed below.

First False Claims Act Settlement for Discriminatory Practices

On April 10, 2026, DOJ announced the first corporate settlement with a Government contractor under the FCA for discriminatory hiring practices. IBM agreed to pay $17 million to resolve claims that it violated the FCA by engaging in unlawful discrimination, and then allocating costs for those practices to federal contracts and submitting them for payment or reimbursement. Specifically, the settlement alleges that IBM engaged in illegal discrimination by implementing recruiting policies that required “diverse interview slates” and “diverse sourcing” of candidates, and by offering training and mentorship programs to current employees based upon race, color, national origin, or sex. 

Notably, IBM received credit in the settlement under DOJ’s Guidelines for Taking Disclosure, Cooperation, and Remediation into Account in False Claims Act Matters. (See our recent client alert discussing DOJ’s new and unified self-disclosure policy, which created a single set of standards for voluntary self-disclosure, cooperation, and remediation across the Department.) Although the signed settlement agreement does not identify the credit that IBM received for its cooperation, the agreement outlines that IBM’s efforts included disclosing relevant facts early in the Government’s investigation, providing information helpful to determining damages and penalties arising from the alleged conduct, and undertaking voluntary remedial measures.

The multi-million dollar settlement highlights the Administration’s focus on using the FCA to address hiring and employment practices it considers discriminatory and emphasizes the resultant risk to contractors. The settlement identifies specific practices that the Administration alleges are unlawful and discriminatory and provides a stark warning to other contractors that may engage in similar practices.

Implications for Federal Contractors

Contractors should be prepared to address these impending FAR changes on an emergency basis. The current Administration has been clear that eliminating practices by federal contractors and subcontractors that it views as violative of anti-discrimination laws is an enforcement priority. The use of the FCA to enforce these requirements is not new (see DOJ Civil Rights Fraud Initiative), but the announcement of the first settled case involving a Government contractor in this area highlights the immediacy of the compliance risk for federal contractors and subcontractors concerning these practices.

There are steps contractors can take right now to limit their risk in this area. For example, we recommend that contractors carefully analyze the specific definitions contained in EO 14398, and with those definitions in mind, evaluate current hiring, employment, and other potential policies and procedures covered by the EO to ensure compliance with the requirements of the EO clause as well as relevant federal, state, and local anti-discrimination laws. Higher-tiered contractors will also need to develop a process to detect and report subcontractor violations. Finally, more than ever, contractors must carefully consider whether they are in a position to execute a representation or certification contained in a grant or contract related to compliance with anti-discrimination laws and related EOs and certifications.

Cozen O’Connor’s False Claims Act Defense Group and the firm’s Government Contracts, White Collar, and Labor & Employment attorneys are following these issues closely, so please reach out to us with any questions.