Executive Order seeks to impose FCA liability for contractor and grantee DEI programs

A key feature of the Executive Order is its clear intention to empower whistleblowers down the road to trigger enforcement under the civil False Claims Act (FCA) by alleging that federal contractors and grant recipients failed to comply with regulations and contract and grant clauses contemplated under the EO. In relevant part, the EO directs each agency head to include terms in every contract or grant award making clear that the contractor/grantee: (A) agrees that compliance with “all applicable Federal anti-discrimination laws is material to the government’s payment decisions” for FCA purposes; and (B) certifies that it does “not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.”

These provisions, and in particular the EO’s specific reference to the FCA in that context, signal the administration’s plan to rely on the federal government’s “primary litigative tool for combatting fraud”³ to attack DEI programs it deems discriminatory. Because claims and certifications submitted under contracts and grants potentially implicate the FCA, whistleblower allegations of knowing failures to comply with those terms may be a precursor to investigations and ultimately litigation under the FCA if the EO’s terms are incorporated.

Litigation seeking to enjoin the EO is now pending⁴, but the administration has clearly signaled that it wants to encourage use of the FCA to discourage DEI-related initiatives.

Pertinent provisions of the FCA

Under the FCA, 31 U.S.C. § 3729, et seq., a Federal contractor or grantee who knowingly presents, or causes to be presented, false claims for payment or false statements material to the government’s payment decision will be liable for three times the government’s damages plus penalties and costs. A key aspect of the FCA is its qui tam provisions, which allow whistleblowers, known as “relators,” to bring FCA suits on behalf of the government and, in exchange, to receive a portion of the proceeds of the action or settlement of the claim.⁵ The FCA also contains antiretaliation protections to protect any such whistleblowers who report or seek to “stop” FCA violations.⁶

To prove an FCA claim, the government or a relator must present evidence of falsity, scienter (knowledge), materiality, and causation. The FCA defines “knowingly” to include acting with deliberate ignorance or reckless disregard of the truth or falsity of the information.⁷ A defendant’s subjective beliefs are relevant to this inquiry, including whether a defendant is aware of “a substantial and unjustifiable risk that [its] claims are false.”⁸ To satisfy the FCA materiality requirement, the government or a relator must prove the alleged falsity was material to the government’s payment decision. Supreme Court precedent makes clear that materiality is a fact-intensive, “demanding” standard.⁹

In many FCA cases, liability is premised on allegations of “legal falsity,” where a defendant allegedly falsely certifies either expressly or impliedly that it complied with a statutory, regulatory, or contractual requirement that is material to the government’s decision to pay the claim.

FCA liability hurdles

Notwithstanding the intention of the EO, the government or a relator would have to clear several significant hurdles to prove an FCA violation. First and foremost, as discussed above, the EO is forward-looking. It instructs heads of agencies to include certain terms in federal contracts and grant awards.¹⁰ Unless and until those terms are included, the EO standing alone should not materially increase FCA risk. As for existing procurement contracts, there are processes in place that must be followed before the government can amend such contracts.¹¹

Once the EO’s terms are adopted and included in contracts and grant awards, there would only be potential FCA liability if falsity could be proven, meaning that a court concludes an entity’s DEI programs actually violate a federal anti-discrimination law. Significantly, the EO does not attempt to redefine what violates federal anti-discrimination law, and the Executive Branch’s ability to change anti-discrimination laws may be limited due to the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, which reduces judicial deference given to agency interpretations of law.¹² The government or a relator would also have to show scienter, which could be a difficult hurdle if an entity concluded in good faith, particularly in connection with a review by competent legal counsel, that its DEI initiatives were entirely legal. Finally, Escobar stands firmly for the proposition that simply asserting that compliance with a certain law is material under the FCA does not make it so.¹³ Rather, it is one of many factors a court should consider when determining whether the materiality threshold has been met.¹⁴ As a result, materiality could still be a viable defense even if the terms set forth in the EO are implemented.

How the FCA’s requirements are interpreted, however, may ultimately depend on the individual jurisdiction, and judges in some jurisdictions may be particularly willing to let FCA claims related to the EO proceed to discovery.

Takeaways

The EO creates potential FCA enforcement risk for entities that contract with the federal government or receive federal grants. Although entities will almost certainly have viable FCA defenses if the terms in the EO are implemented, entities should anticipate that there will be FCA investigations in the space perhaps driven by qui tam filings and that qui tam filings could commence quickly. This is yet another reason why it would be prudent, if your organization hasn’t done so already, to implement best practices, mitigate DEI risks, and prepare for potential investigations and disputes.

For assistance navigating these difficult issues and more information about the EO and its potential implications, please reach out to the team identified below or to any Hogan Lovells lawyer with whom you work.

Authored by Mitch Lazris, Jonathan Diesenhaus, Michele Sartori, Michael Theis, Stephanie Yonekura, Michelle Roberts Gonzales, Alexandra Bailey, and Rachel Stuckey.