Trump Administration Executive Order “Addressing DEI Discrimination by Federal Contractors” Highlights False Claims Act Risks and Other Consequences

On March 26, 2026, President Trump issued Executive Order (“EO”) 14398, titled Addressing DEI Discrimination by Federal Contractors, directing federal agencies to include new contractual terms relating to diversity, equity, and inclusion (“DEI”) activities, with significant potential False Claims Act (“FCA”) enforcement consequences for contractors. Pursuant to EO 14398, federal contracts, subcontracts, and “contract-like instruments” must include a clause prohibiting contractors from engaging in “racially discriminatory DEI activities.” EO 14398 threatens noncompliance consequences that include contract termination, suspension and debarment, and FCA liability. EO 14398 and its accompanying Fact Sheet highlight that contractors will face heightened compliance risk with respect to DEI programs, with the Department of Justice (“DOJ”) specifically directed to prioritize FCA enforcement in this space.

EO 14398 builds on the Trump administration’s efforts to address what it perceives to be illegal DEI in federal contracting and within the federal government. Specific to federal contractors, in January 2025, EO 14173 required federal agencies to include in all federal contracts and grants a term requiring the contractor or grant recipient to agree that compliance with federal anti-discrimination laws is material for FCA purposes, and to certify that it “does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.” Those certifications are the subject of ongoing legal challenges raising First Amendment and other arguments. In May 2025, DOJ announced the creation of a “Civil Rights Fraud Initiative” aimed at using the FCA to redress knowingly false representations related to civil rights laws. In July 2025, the attorney general issued a memo providing examples of DEI and other employment-related activities the government considers to be discriminatory under federal civil rights laws. And, in January 2026, the General Services Administration requested public comments on a proposed revision to the System for Award Management (“SAM”) registration process that would require recipients of federal financial assistance to certify that they do not have an unlawful DEI program. This latest EO expressly states that the Trump administration’s DEI enforcement priorities extend beyond prime contractors and clarifies the enforcement mechanisms that the government may pursue to ensure compliance.

Requirements

EO 14398 states that its goal is to prevent racial discrimination by prohibiting federal contractors from engaging in “racially discriminatory DEI activities,” a phrase which is defined 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.” It further defines “program participation” to include training, mentoring or leadership development programs, educational opportunities, clubs, or similar opportunities that are sponsored or established by the contractor or subcontractor. The phrase “disparate treatment” is generally understood within the context of federal anti-discrimination law to refer to the intentional, differential treatment of individuals on the basis of a protected characteristic.

Federal agencies must ensure that contracts, subcontracts, and other instruments include a clause with the following provisions by April 25, 2026.

• Prohibition on Racially Discriminatory DEI Activities: The contractor will not engage in any “racially discriminatory DEI activities,” as defined in EO 14398 and explained above.
• Audit Compliance: The contractor will furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency for purposes of ascertaining compliance with the clause.
• Noncompliance Penalties: In the event of the contractor’s or a subcontractor’s noncompliance with the clause, the 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.
• Subcontract Monitoring & Reporting: The contractor will 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 directed by the contracting department or agency.
• Litigation Notification: 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 the clause.
• FCA Materiality: The contractor recognizes that compliance with the requirements of the clause are material to the government’s payment decisions for purposes of the FCA.

The EO does not state whether agencies must include the clause only in new contracts prospectively or also in existing contracts, a significant ambiguity. The EO also requires that, within 60 days of the date of the EO, the Federal Acquisition Regulatory Council shall, to the extent permitted by law, amend the Federal Acquisition Regulation (“FAR”) to include the clause described above, eliminate any provisions that are in conflict with the clause, and issue deviation and interim guidance to agencies.

Penalties and Enforcement

EO 14398 purports to give the government broad discretion to sanction a contractor for noncompliance, including by terminating the contract or initiating suspension/debarment proceedings that threaten to restrict or eliminate a company’s ability to do business with the federal government. The government already can terminate contracts for default due to noncompliance with contract terms under FAR clauses 52.212-4 and 52.249-6 through -10, but EO 14398 appears to contemplate eliminating contracting agencies’ discretion to terminate by mandating termination due to noncompliance with the forthcoming clause. Moreover, while the FAR already includes several broad “catch-all” causes for suspension and debarment tied to willful performance failures and unethical conduct, it appears that EO 14398 attempts to create additional specific triggers for suspension and debarment tied to noncompliance with the EO. Notably, the EO does not independently modify the FAR — that would require a notice-and-comment rulemaking — but agencies may be directed to issue deviations from the FAR to implement the EO.

Further, as discussed above, the contract clause requires the contractor to acknowledge that compliance with the “racially discriminatory DEI” prohibitions is material to the government’s payment decision. This materiality acknowledgement is intended to bolster assertions of FCA liability against contractors premised on implied false certifications of compliance. EO 14398 instructs the attorney general to consider bringing FCA actions for violations and ensure “prompt” review of qui tam actions alleging violations, “to the maximum extent practicable” within 60 days. The latter provision reflects an intention to expedite DOJ investigations in response to qui tam complaints, which ordinarily take much longer than 60 days, especially in complex cases. Brenna Jenny, the Deputy Assistant Attorney General for DOJ’s Commercial Litigation Branch overseeing DOJ’s Fraud Section has publicly confirmed in recent remarks that DOJ is actively conducting FCA investigations into government contractors related to alleged violations of anti-discrimination laws.

Takeaways

The requirements imposed by the new contract clause mandated by EO 14398 are by far the broadest to date, with consequences for all types of federal procurements, including for commercial products and services. Moreover, the EO’s reference to “contract-like instruments” suggests that the new requirements could potentially apply not only to federal contracts subject to the FAR, but also to other transaction agreements (“OTAs”) and other alternative acquisition vehicles. And notably, the new clause expressly flows down the requirements to subcontractors at every tier.

The new clause required by EO 14398 underscores the heightened risks of FCA exposure related to certifications of compliance with anti-discrimination laws that may give rise to an allegedly knowing false statement. The definition of “racially discriminatory DEI activities” specifically defines the “DEI activities” that the government may consider discriminatory under applicable federal anti-discrimination laws, and upon which basis it may allege materiality for FCA purposes. This is distinct from EO 14173, which required certification only generally that a contractor or grant recipient did not operate any DEI programs that violate “applicable Federal anti-discrimination law.”

While it is unclear whether the new requirements will be incorporated into new contracts only, or if existing contracts will be modified (presumably by way of a bilateral modification) to include the new contract clause, contractors and subcontractors should promptly assess their DEI-related programs and practices with respect to training, mentoring, and leadership development initiatives that may fall within the definition of “racially discriminatory DEI activities” in EO 14398. Given the growing number of government directives and initiatives in the area, contractors and subcontractors should work closely with counsel to determine their legal and contractual obligations related to anti-discrimination requirements.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.