New Executive Order Creates False Claims Act Exposure for Federal Contractors Over DEI-Related Conduct

By Brett W. Johnson, Jason Spitalnick, Sam Crockett Neel, Sarah E. Delaney, and Thomas Williams

Beginning April 25, 2026, all federal government contracts must contain a new clause prohibiting certain diversity, equity, and inclusion (DEI) activities.

On March 26, 2026, President Donald Trump signed Executive Order 14,398 (the Executive Order) that represents the most operationally consequential step to date in the Administration’s stance against continued DEI programs.¹ Prior executive actions² targeted DEI within the federal government and among recipients of federal financial assistance. However, this Executive Order extends the prohibition to federal procurement contractors and their subcontractors, and it does so with enforcement mechanisms that are significant, including False Claims Act (FCA) prosecution, mandatory contract termination, and suspension and debarment proceedings.

The Executive Order invokes the Federal Property and Administrative Services Act (FPASA)³ and its familiar “economy and efficiency” rationale — the same statutory basis that supported the antidiscrimination regime under the now-revoked Executive Order 11,246 and the now-largely-dismantled Office of Federal Contract Compliance Programs. This represents a fundamental doctrinal shift: the legal authority that once mandated affirmative action in federal contracting is now being referenced to prohibit such practices.

I. What the Executive Order Does

The Executive Order 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.”⁴ The definition of “program participation” sweeps broadly, encompassing “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.”⁵

The Executive Order directs executive departments and agencies subject to the FPASA to ensure that “contracts and contract-like instruments, including contractors’ subcontracts and subcontractors’ lower-tier subcontracts” include the following clause:

In connection with the performance of work under this contract, [the contractor/appropriate party (contractor)] agrees as follows:

1. The contractor will not engage in any racially discriminatory DEI activities, as defined in section 2 of the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors);

2. The contractor will furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency pursuant to the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors), for purposes of ascertaining compliance with this clause;

3. In the event of the contractor’s or a subcontractor’s noncompliance with this clause, this contract may be canceled, terminated, or suspended in whole or in part, and the contractor or subcontractor may be declared ineligible for further Government contracts;

4. The contractor will report any subcontractor’s known or reasonably knowable conduct that may violate this clause to the contracting department or agency and take any appropriate remedial actions directed by the contracting department or agency;

5. The contractor will inform the contracting department or agency if a subcontractor sues the contractor and the suit puts at issue, in any way, the validity of this clause; and

6. The contractor recognizes that compliance with the requirements of this clause are material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act).

This new clause, which must be in all future federal government contracts, imposes significant ramifications for any contractor found to be engaging in certain DEI activities.

II. FCA Enforcement Mechanism

The most consequential feature of the Executive Order is its designation of compliance with the new contract clause as a “material term of payment” under the False Claims Act.⁶ This is the provision that transforms a contract compliance obligation into a fraud enforcement risk.

The FCA imposes liability on any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment” to the federal government.⁷ By declaring DEI compliance a material condition of payment, the Executive Order creates a theory under which a contractor’s invoice — submitted in the ordinary course of contract performance — could be treated as a false claim if the contractor is simultaneously engaged in conduct the government characterizes as racially discriminatory DEI activity. The “knowingly” standard under the FCA includes not only actual knowledge but also deliberate ignorance and reckless disregard, which lowers the scienter threshold and heightens the risk of non-compliance for contractors.

The “materiality” reference also may trigger applicability even when the clause is not referenced in a government contract or properly flowed down to the subcontractor. Under the Christian Doctrine, certain material clauses can be “read into” a contract with the government. So, even if not included in the prime contract or lower tiered contract, the clause could still be applicable.

The Executive Order also directs the U.S. Department of Justice (DOJ) to prioritize DEI-related FCA enforcement. That directive, combined with the FCA’s qui tam provisions — which allow private whistleblowers to file suit on the government’s behalf and collect a share of any recovery — creates additional legal exposure. Federal contractors now face enforcement risks from both the government and current or former employees with knowledge of internal DEI programs.

III. Mandatory Penalties and the Removal of Discretion

Under typical procurement practices, a contracting officer retains discretion in determining how to address a contractor’s noncompliance, with options ranging from corrective action to termination for cause. The Executive Order removes that discretion. It mandates that agencies terminate contracts and “take appropriate action to suspend and debar contractors or subcontractors” upon a finding of noncompliance with the new clause.⁸

The clause also imposes a mandatory reporting obligation on prime contractors, who must report “any subcontractor’s known or reasonably knowable conduct that may violate this clause” to the contracting agency. The “reasonably knowable” standard is critical: it imports a constructive knowledge obligation, meaning a prime contractor cannot insulate itself by simply declining to look. Companies with large subcontractor networks should take particular note of this provision.

IV. Enforcement Efforts

DOJ enforcement efforts are already underway in parallel enforcement actions. On April 10, 2026, International Business Machines Corporation (IBM) entered into a settlement agreement with the United States and agreed to pay $17,077,043 to resolve allegations that it violated the False Claims Act under the DOJ’s Civil Rights Fraud Initiative. IBM was alleged to have certified compliance in its federal contracts while it knowingly maintained employment practices that the United States contends discriminated against employees and applicants on the basis of race, color, national origin, or sex.⁹

The conduct identified in the IBM settlement provides a roadmap for the practices DOJ is likely to target under the Executive Order. The DOJ alleged that IBM: (1) used a “diversity modifier” tying executive bonus compensation to demographic targets; (2) factored race or sex into hiring through “diverse interview slates” and “diverse sourcing”; (3) developed race and sex demographic goals for business units and took those characteristics into account when making employment decisions to achieve progress toward those goals; and (4) offered certain training, 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.¹⁰

Although IBM did not admit liability and received cooperation credit for early disclosures and voluntary remediation, the covered-conduct period extended back to January 1, 2019, confirming that DOJ is prepared to scrutinize federal contractors’ historical DEI programs retroactively — a posture that materially amplifies the exposure created by the new contract clause in the Executive Order.

V. What Federal Contractors Need to Know

The compliance timeline is compressed. Federal agencies must incorporate the new clause by April 25, 2026 (within 30 days of the order), the Federal Acquisition Regulatory Council (FAR Council) must issue interim guidance within 60 days, and DOJ has been directed to actively consider FCA enforcement actions. Contractors that delay action risk being caught flat-footed. Consider the following action items:

Audit your DEI-adjacent programs. Government contractors at every tier should conduct a targeted internal review of any program involving race- or ethnicity-conscious criteria in hiring, promotion, mentoring, training, vendor selection, or resource allocation — particularly as those programs relate to federally contracted work. The goal is not to dismantle every diversity initiative, but to identify programs whose design or implementation could be characterized as disparate treatment within the Executive Order’s spacious definition.

Strengthen subcontractor oversight. Prime contractors should assess their subcontractor compliance monitoring in light of the mandatory reporting obligation and the “reasonably knowable” standard. A prime contractor that fails to report a subcontractor’s noncompliance faces its own exposure — and willful ignorance is not a defense.

Examine invoicing and certification processes. Because the Executive Order designates compliance as a material condition of payment, every claim submitted to the government is a potential FCA predicate. Personnel responsible for submitting invoices and certifications must understand the new compliance landscape, and internal controls should be in place to flag potential issues before claims are submitted.

Prepare for qui tam exposure. The FCA’s whistleblower provisions create substantial incentives for current and former employees to bring suit. The combination of a broadly defined prohibition, a pre-established materiality finding, and private enforcement incentives makes these cases attractive.

Prepare for government inquiries. When initial executive orders were issued impacting government contractors, letters demanding explanation and certification were issued by the government to the contractors. Companies should consider having a vetting, due diligence review process, ready response, and authorized responder in place to quickly address any such requests. In the event there is an investigation, the same process can be used to address the initial inquiry, civil investigative demand, or other request initiating the investigation.

VI. Conclusion

Whether this Executive Order produces meaningful FCA enforcement actions or primarily functions as a deterrent that reshapes government contractor behavior without extensive litigation will remain to be seen. The IBM settlement may be a precursor, indicative of heightened enforcement by the DOJ under the FCA. Either way, federal contractors should not wait for the FAR Council’s implementing clause to begin evaluating their exposure.

The Executive Order broadly defines problematic conduct, designates a strict enforcement mechanism, and removes the discretionary cushion that has historically softened procurement compliance disputes. Snell & Wilmer will continue to monitor developments in this area.  

***Opinions expressed are those of the authors and not necessarily the firm’s or their colleagues’.