The past year brought sweeping legal, regulatory, and political shifts that reshaped the federal grants landscape and left nonprofit recipients facing heightened uncertainty. In a recent webinar, Venable attorneys examined how court decisions, executive actions, and agency policies converged in 2025 to redefine compliance expectations and risk for grantees as we head into 2026.
Courts Redefine Grant Disputes
Much of the discussion focused on how federal courts, including the U.S. Supreme Court, began to more clearly define the rights and remedies available to grant recipients in the context of dispute under their agreements. Partner Scott Sheffler described 2025 as "an incredibly impactful year," in terms of executive action and in the courts, noting that litigation over federal agency authorities reached levels not seen since early twentieth-century administrative law battles. Most notable among these cases was the Supreme Court's divided decision in National Institutes of Health v. AFFA, which limited the ability of grantees to seek reinstatement of terminated awards in district court and instead routed many disputes to the Court of Federal Claims. Sheffler emphasized that the ruling signaled "a fundamental change in the grant system," forcing organizations to rethink litigation strategy when challenging agency actions.
Other cases illustrated narrower but significant openings for relief. For example, in a challenge brought by Radio Free Europe with respect to delays in its funding, the U.S. District Court for the District of Columbia held that when Congress explicitly directs funding by statute, agencies have little discretion to withhold awards. Sheffler underscored the lesson for nonprofits: "If you can be named in the statute...you'll be in a much stronger position." To this end, funding secured by earmark may prove increasingly important. Meanwhile, high-profile disputes involving Harvard University showed that constitutional and civil rights claims may still anchor grant challenges in district court, preserving the possibility of injunctive relief when agencies fail to follow required procedures.
DEI Policies and Compliance Risks
Another dominant theme was the federal government's aggressive reinterpretation of civil rights laws in the context of diversity, equity, and inclusion initiatives. Partner Dismas Locaria explained that a series of executive orders issued early in 2025 sought to eliminate what the administration viewed as preferential treatment based on protected characteristics. "These laws have not changed," Locaria said, referring to long-standing civil rights statutes. "What has changed...is the intended interpretation by the administration and the Department of Justice." That reinterpretation led to government-wide grant reviews resulting in mass terminations of what the administration viewed as illegal DEI programming.
The Justice Department's midyear guidance on what might constitute illegal DEI amplified uncertainty by identifying not only explicit preferences but also "proxies" that could trigger enforcement, including institutional targeting and certain training programs. Locaria warned that the inclusion of material compliance certifications in grant agreements raised the specter of False Claims Act liability, creating what he described as "a very strong stick to force compliance." Although several courts questioned the vagueness of the executive orders, nationwide injunctions have largely been curtailed, resulting in what Locaria called a "patchwork" of injunctive relief applicable to certain agencies and certain geographic regions of the country. As a result, the administration's effort to impose anti-DEI requirements and certifications have largely begun across the government and are likely to take a firmer hold in 2026.
Indirect Costs and Agency Authority
Indirect cost recovery emerged as another flashpoint. Multiple agencies attempted to impose caps on indirect rates, prompting swift legal challenges. Sheffler noted that courts consistently rejected those efforts, relying on both appropriations riders and the structure of the Uniform Guidance. "None of the attempts at rate caps have been successful," he said, adding that Congress has begun to respond by further restricting agency authority through legislation. The clash highlighted growing tension between the executive branch and lawmakers over how much discretion agencies should have in reshaping grant economics.
What Lies Ahead for Grantees
Looking forward, speakers agreed that 2026 will bring continued volatility. Partner George Constantine framed the past year as "among the most consequential 12 months ever in this area," citing the convergence of executive orders, litigation, and delayed congressional action. A key concern is an executive order directing senior political appointees to review discretionary awards and mandating revisions to the Uniform Guidance that could formalize termination-for-convenience authority. Locaria cautioned that such changes may further erode stability for recipients, particularly if agencies gain clearer authority to simply terminate grants that no longer align with administration priorities.
Taken together, the developments reviewed during the webinar underscored a stark reality for nonprofits: federal grants now operate in a far more politicized and legally complex environment. As Constantine observed, organizations will need to adapt quickly as courts, Congress, and agencies continue to redefine the rules governing federal funding.
If you or your organization have questions, contact the presenters or visit Venable.com to learn more about our Nonprofit Organizations Group.
