According to reporting from the Wall Street Journal (WSJ) on December 28, 2025, the Department of Justice (DOJ) has initiated investigations into diversity, equity, and inclusion (DEI) practices of major companies that contract with or receive funding from the federal government, relying on a novel application of the civil False Claims Act (FCA). The report indicates that the DOJ has demanded documents and information from companies across multiple industries—including technology, telecommunications, automotive, defense, pharmaceuticals, and utilities—seeking details about their workplace policies and programs.
Although such investigations have been expected following DOJ policy announcements earlier in 2025, the reported commencement of the investigations is noteworthy for all federal contractors and grantees. It highlights the need for careful evaluation of employment practices, internal policies, and practices in social service delivery programs. Below, we provide a synopsis of the legal frameworks at issue and practical risk mitigation steps.
E.O. 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity
As we reported earlier this year, one of the most consequential developments impacting recipients of federal funding in 2025 has been the rollout of new contract and grant terms under Executive Order (E.O.) 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity (January 21, 2025).
Under the E.O., the president directed each federal agency head to "include in every contract or grant award" a term requiring the recipient to:
- "certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws."
- "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," i.e., the civil False Claims Act
Although ongoing litigation has delayed or limited implementation of these new provisions in certain instances[1]—producing uneven, program-specific effects after the Supreme Court's recent holding that district courts generally lack authority to issue nationwide injunctions[2]—the new terms have nonetheless been implemented in many programs and applied to numerous grantees.
Civil False Claims Act
The FCA imposes liability on anyone who knowingly presents, or causes to be presented, a false claim for payment to the federal government; "knowing" conduct includes actual knowledge, deliberate ignorance, or reckless disregard of the truth or falsity of the representation, and liability carries treble damages and civil penalties.[3]
Historically, FCA enforcement has focused on billing fraud, inflated pricing, or failure to deliver contracted services. As the WSJ notes, DOJ is now embracing the theory that holding federal contracts while maintaining certain DEI-related hiring or promotion practices may itself constitute fraud, on the premise that contractors are not complying with anti-discrimination obligations tied to their federal funding.
Whether this theory can be successfully litigated remains uncertain. FCA liability requires the contractor's or grantee's alleged false certification to be material to the government's payment decision.[4] The E.O. tailors the new contract and grant language in an attempt to satisfy materiality. As one can imagine, not all matters of non-compliance in the performance of a complex government contract or grant are material to payment. Whether including materiality language in a contract or grant is enough to establish materiality remains to be seen. Even if sufficient, DOJ would still have to prove knowledge and falsity—typically through fact-intensive inquiries.
Nonetheless, the investigative phase alone can impose substantial burdens. First, even absent any actual violation, the mere fact of a fraud allegation can cause reputational harm, with both federal contracting and grant-making agencies and the public. Second, FCA investigations often involve extensive document production and internal reviews, even if no enforcement action ultimately follows. Third, the FCA contains qui tam provisions, under which private individuals with non-public knowledge of possible violations may initiate and maintain actions against contractors and grantees—even if the government declines to intervene in the lawsuit.[5] Defending such suits, even when baseless, is a significant undertaking.
DOJ Memoranda of May 19 and July 29, 2025
As described above, the FCA liability framework creates considerable legal risk for entities that regularly interact with the federal government through contracts and grants. Heightening that risk in the DEI area, on May 19, 2025, DOJ issued a memorandum announcing a new "Civil Rights Fraud Initiative" to use the FCA to "investigate and, as appropriate, pursue claims against any recipient of federal funds" that knowingly engages in race-, ethnicity-, or national-origin-based preferences; the memorandum also "strongly encouraged" qui tam actions.
This enforcement focus naturally leads many contractors and grantees to ask what DEI measures violate federal anti-discrimination laws. For those facing FCA accusations, the answers to this question are less clear than they should be, given the complex history of federal anti-discrimination laws[6] and constitutional limitations.[7] These are each subject to varied and evolving scopes and interpretations, including, for example, significant recent decisions by the Supreme Court in Students for Fair Admissions, Inc. v. President & Fellows of Harvard College[8] and Bostock v. Clayton County.[9]
Against this backdrop, on July 29, 2025, DOJ issued a memorandum setting forth its view on what may constitute unlawful discrimination,—asserting, in effect, that an employment practice or program implementation decision that is not race- or sex-neutral is suspect and is undertaken at risk.
Risk Mitigation Measures in an Evolving Enforcement Environment
Federal contractors and grantees facing new FCA terms in their contracts and grant agreements should consider proactive steps to assess and manage risk. While no mitigation program can eliminate all risk, the following steps may help reduce potential FCA exposure:
- Evaluate employment practices and program structures (from healthcare delivery to education), including hiring, promotion, and incentive programs, for race- or sex-specific differences in treatment
- Assess higher-risk employment practices under federal anti-discrimination laws, particularly Title VII of the Civil Rights Act of 1964
- Evaluate whether any higher-risk program-delivery models may violate federal anti-discrimination laws, particularly Title VI of the Civil Rights Act of 1964 or Title IX of the Education Amendments Act of 1972
- Consider any state-law constraints, including state anti-discrimination or affirmative-action mandates that may complicate compliance decisions
- Document compliance reviews and decision making, so that any certifications made under E.O. 14173 can be supported by contemporaneous evidence of a good faith belief in their accuracy
Venable LLP's federal grants, government contracts, and false claims attorneys will provide continued client alerts on new federal agreement terms that present fraud enforcement risk. For any questions in this area, contact Valerie Cohen, Dismas Locaria, or Scott Sheffler.
[2] Trump v. CASA, Inc., 606 U.S. 831, 860 (2025).
[4] Universal Health Servs. v. United States ex rel. Escobar, 579 U.S. 176, 181 (2016) ("A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision in order to be actionable under the False Claims Act.").
[5] 31 U.S.C. 3730(b).
[6] See, e.g., Title VI of the Civil Rights Act of 1964; 42 U.S.C. § 2000d et seq. (prohibiting discrimination on the basis of race, color, or national origin in federally supported programs); Title VII of the Civil Rights Act (prohibiting discrimination on the basis of race, color, national origin, sex, or religion in employment practices); 42 U.S.C. § 2000d et seq.; and Title IX of the Education Amendments Act of 1972, 20 U.S.C. 1681 et seq. (generally prohibiting discrimination on the basis of sex in education programs).
[7] Equal Protection Clause of the Fourteenth Amendment (prohibiting discrimination on the basis of race or sex by state or local government entities).
[8] 600 U.S. 181 (2023) (adopting a strict view of nondiscrimination requirements under Title VI of the Civil Rights Act of 1964 and the Equal Protection Clause of the Fourteenth Amendment in the context of university admissions).
[9] 590 U.S. 644 (2020) (holding that the prohibition against discrimination on the basis of sex under Title VII of the Civil Rights Act of 1964 encompasses prohibitions against discrimination on the basis of sexual orientation and transgender status).