As we have covered in previous client alerts, in February 2025, the National Institutes of Health (NIH) asserted a policy of capping indirect cost rates for federal grantees at 15 percent. That policy was successfully challenged in the U.S. District Court for the District of Massachusetts by a group of states as well as multiple associations representing institutions that participate in NIH research grants. NIH appealed the district court's decision.
On Monday, January 5, 2026, the U.S. Court of Appeals for the First Circuit upheld the district court's decision on two grounds.[1] First, it held that certain language appearing annually in U.S. Department of Health and Human Services (HHS) appropriations statutes since 2018 operated to prohibit the rate cap. Second, it held that the rate cap was inconsistent with indirect rate-related regulatory language appearing in the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards ("Uniform Guidance") as adopted by HHS at 45 C.F.R. Part 75.[2]
Additionally, the First Circuit rejected arguments by the government that the district court lacked jurisdiction under the Administrative Procedure Act (APA) to consider plaintiffs' challenges to the NIH policy change. Applying the reasoning of Justice Barrett's critical concurring decision in the Supreme Court's recent ruling in NIH v. American Public Health Assoc. (APHA), 145 S. Ct. 2658 (2025), the First Circuit reaffirmed that challenges to agency-wide policies are properly brought under the APA, even when the subject matter may have downstream implications for payments under grant agreements.
With language addressing deviations from negotiated indirect cost rate agreements (NICRAs) being one of the expected topics of pending Office of Management and Budget (OMB) updates to the Uniform Guidance, the contours of this decision may influence the language of the eventual updates.
Note that other cases involving indirect rate cap policies continue to work their way through the court system. While the First Circuit's decision in this case may be an indication of potential outcomes on certain issues in those cases, each rate cap has its own nuances and considerations. A table (updated since our December 12, 2025 alert) summarizing the status of each case is provided below.
Cap |
Case |
Status |
|
Department of Defense |
Association of American Universities, et al. v. Department of Defense, et al., Docket No. 25-2184 (1st Cir., filed Dec. 9, 2025) |
D. Mass. vacated policy through final judgment on October 10. DoD has appealed to the First Circuit. Note that any DoD rate cap will also be subject to the prerequisite processes and certifications imposed by the recently enacted NDAA, as discussed in our December 12 client alert. |
|
Department of Energy (IHE rate cap) |
Association of American Universities, et al. v. Department of Energy, et al., Docket No. 25-1727 (1st Cir., filed Jul. 31, 2025) |
D. Mass. vacated policy flash and enjoined application. Appeal to First Circuit under way. Appellant's (government) brief filed September 24. Proceedings suspended during government shutdown. With recommencement of government operations, Appellant's response brief filed December 22. Government's reply brief due February 2. |
|
Department of Energy (State/Local rate cap) |
State of New York, et al. v. Department of Energy, et al., Docket No. 25-cv-1458 (D. Or., filed Aug. 15, 2025) |
D. Or. Vacated Policy Flash 2025-25 (State/Local Government Cap). Thus far, no appeal by the government. |
For questions related to indirect cost rates or the pending Uniform Guidance updates, you may contact Venable's attorneys, Chris Griesedieck, Diz Locaria, Scott S. Sheffler, or Timothy Iversen. For more information on Venable's Government Grants Practice in general, feel free to visit our website page.
And to register for our "2025 Grants Year in Review," click here.
[1] See Massachusetts v. NIH, No. 25-1343, 2026 WL 26059, at *1 (1st Cir. Jan. 5, 2026). The decision was issued with respect to three related appeals from three related district court cases: Massachusetts v. NIH, No. 25-1343 (1st Cir. 2025); Assoc. of American Med. Colleges v. NIH, No. 25-1344 (1st Cir. 2025); and Assoc. of American Universities v. Dep't of Health and Human Servs., No. 25-1345 (1st Cir. 2025).
[2] The Uniform Guidance is set forth at 2 C.F.R. Part 200. Prior to October 1, 2025, HHS implemented the Uniform Guidance at 45 C.F.R. Part 75. The relevant language of 45 C.F.R. Part 75 and 2 C.F.R. Part 200 is materially the same on the indirect rate matters at issue in this case.