Challenging Executive Order on DEI, States Say It Gets FCA Materiality Wrong

On June 10, 2026, nineteen states and the District of Columbia filed an Administration Procedure Act suit challenging President Trump’s Executive Order No. 14398 (the EO), on which we have previously reported here.  The EO advances the Trump Administration’s goal to eradicate diversity, equity, and inclusion (DEI) activities among federal contractors by, among other things, expressly tethering DEI to potential FCA liability.  Targeting the EO’s language on FCA liability, the plaintiff states argue that it contravenes the materiality test established by the Supreme Court in Escobar.

As we have previously reported here, here, and here, the Trump Administration has sought to use the FCA to combat allegedly unlawful discrimination in the form of DEI conduct.  The EO, issued March 26, 2026, directs federal agencies to ensure that their contracts with federal contractors provide, among other things, that:

• The contractor will not engage in “‘racially discriminatory DEI activities’”;
• The contract may be canceled if the contractor violates the anti-DEI mandate; and
• The contractor recognizes that compliance with the DEI mandate is “‘material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act).’”

The EO also directs that the U.S. Attorney General (1) consider whether to bring FCA suits against contractors violating the required contractual provisions; and (2) ensure prompt review of FCA qui tams concerning federal contracts.

The plaintiff states advance two main arguments challenging the EO and agencies’ efforts to implement it.  First, they argue, the agencies’ actions are arbitrary and capricious.  The scope and meaning of “racially discriminatory DEI activities” are unclear—likely chilling salutary activity and increasing compliance costs.  Further, neither the EO nor agencies’ implementing actions identify evidence supporting the EO’s claims that by “‘artificially limiting’” hiring and promotion, DEI imposes costs, creates excessive workplace turnover, jeopardizes employee collaboration, and reduces the pool of available workers.

Second, the states argue that efforts to incorporate the EO’s contract provisions are unlawful because the provisions did not undergo requisite notice and comment procedures.  Further, the states say, the EO’s provision on FCA materiality “is contrary to law.”  FCA materiality “depends ultimately on the ‘effect on the likely or actual behavior of the recipient of [an] alleged misrepresentation,’” as the Supreme Court held in Escobar in 2016.  “Merely labeling a clause ‘material’ does not make it so.”  The states compare the EO’s provision on materiality to a hypothetical contract term requiring contractors to promise compliance with all federal statutes and regulations.  The Escobar Court expressly held that such a term would not make any and all violations of federal statutes or regulations “material.”

We will continue to monitor the suit.  The complaint is available here.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.