What GSA Contractors Need to Know About the New FAR Deviation for Revoked Executive Order 11246, Equal Employment Opportunity
On February 18, 2025, the General Services Administration (“GSA”) announced that it issued GSA Class Deviation CD-2025-04 (“the GSA Class Deviation”) effective February 15, 2025, to implement Executive Order (“EO”) 14173 titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” which, as Blank Rome has previously written about here and here, revoked the landmark 60-year-old EO 11246 titled “Equal Employment Opportunity.”
Below is a summary of the key takeaways.
Overview:
The GSA Class Deviation only applies to GSA solicitations, contracts, and real property leases. However, it may serve as a preview of how other agencies will implement the revocation of EO 11246.
The GSA Class Deviation does not include new contract clauses or certifications, whether for the expected Diversity, Equity, and Inclusion certification required by EO 14173, or any other subject.
Supplement 1 to the GSA Class Deviation removes the term “gender identity” from FAR 22.801 and from clauses in FAR Part 52 that include the term. The apparent purpose of this removal is to comply with EO 11246 titled “Defending Women from Gender Ideology Extremism and Restoring Biological Truth to the Federal Government.” Notably, Supplement 1 to the GSA Class Deviation states that GSA Contracting Officers (“COs”) “must” notify contractors that “as of February 15, 2025, all uses of the term ‘gender identity’ are not to be recognized or used prospectively by Federal contractors.” There is no guidance on whether or how this prohibition will be made contractually applicable, or the extent of its purported applicability within a contractor’s organization or operations, e.g., to strictly internal communications, to external communications that do not include GSA, to communications with commercial partners, in oral communications, etc. There is likewise no guidance on how, in practical terms, a GSA contractor should cease to “recognize” the phrase “gender identity” nor does the GSA Class Deviation provide or refer to a definition of the phrase “gender identity.” Given these and other issues, we expect this prohibition will be litigated after an affected GSA contractor receives the required CO notice. We recommend that GSA contractors confer with counsel regarding whether and how to respond to a CO notice on this issue. The GSA Class Deviation does not address or purport to prevent GSA contractors from allowing their employees to specify preferred pronouns. (An Office of Personnel Management Memo dated January 29, 2025, has directed the heads of federal agencies to disable Outlook features that prompt government employees for their pronouns.)
Updates Regarding New or Open Solicitations, New Contracts, or Leases with at Least Six Months of Performance Remaining:
COs must amend solicitations or otherwise incorporate the GSA Class Deviation changes prior to contract award. This will generally require the removal of any and all representations and certifications related to affirmative action and equal opportunity compliance. Notably, the GSA Class Deviation does not purport to modify or rescind any applicable affirmative action and equal opportunity obligations arising under a GSA contractor’s contracts or leases with states.
COs must notify contractors that although SAM.gov may continue to require responses to representations based on provisions that will no longer be included in GSA solicitations (such as FAR 52.222-25 Affirmative Action Compliance and FAR 52.212-3(d) Offeror Representations and Certifications – Commercial Products and Commercial Services), GSA COs will neither consider those representations when making award decisions nor enforce the requirements of those clauses.
COs must not include the following clauses in new GSA solicitations:
FAR 52.222-21, Prohibition of Segregated Facilities
FAR 52.222-22, Previous Contracts and Compliance Reports
FAR 52.222-23, Notice of Requirement for Affirmative Action to Ensure Equal Employment Opportunity for Construction
FAR 52.222-24, Preaward On-Site Equal Opportunity Compliance Evaluation
FAR 52.222-25, Affirmative Action Compliance
FAR 52.222-26, Equal Opportunity
FAR 52.222-27, Affirmative Action Compliance Requirements for Construction
FAR 52.222-29, Notification of Visa Denial
Finally, COs must “ensure” that GSA contractors understand that the FAR subparts related to Equal Opportunity for Veterans and Employment of Workers with Disabilities are not affected. Additionally, the GSA Class Deviation states that it does not affect existing federal laws on civil rights, non-discrimination, or any laws that generally apply to a company regardless of whether it is a government contractor.
We will continue to monitor and report on developments as federal agencies continue their efforts to implement EOs and other directives relevant to government contractors.
Mistake No. 8 of the Top 10 Horrible, No-Good Mistakes Construction Lawyers Make: Know the Benefits and Perils of a Privately Administered Arbitration
I have practiced law for 40 years with the vast majority as a “construction” lawyer. I have seen great… and bad… construction lawyering, both when representing a party and when serving over 300 times as a mediator or arbitrator in construction disputes. I have made my share of mistakes and learned from my mistakes. I was lucky enough to have great construction lawyer mentors to lean on and learn from, so I try to be a good mentor to young construction lawyers. Becoming a great and successful construction lawyer is challenging, but the rewards are many. The following is No. 8 of the top 10 mistakes I have seen construction lawyers make, and yes, I have been guilty of making this same mistake.
Most (but not all) commercial construction contracts contain binding arbitration clauses. Whether the contract is between an owner and architect/designer, an owner and prime contractor, or a subcontractor and prime contractor, the decision to arbitrate or litigate a dispute is always negotiable. You can refer back to one of my previous blog posts in this series discussing the pros and cons of binding arbitration vs. litigating in court. But when parties have decided to arbitrate a dispute, the next question is what rules will apply and how will the arbitration be administered?
Most arbitration clauses (especially those in the standard AIA form set of construction project documents) specify that the American Arbitration Association (AAA) will “administer” the arbitration and that the construction rules of the AAA will apply (the “AAA Rules”). Per the AAA Rules, a party filing an arbitration pays a filing fee to the AAA, the amount of which is based on the amount of the claim. For example, the total non-refundable fee (with few exceptions) for a claim (or counterclaim) from $500,000 to $1 million is $12,675. A claim from $1 million to $10 million is $17,450. There are other AAA fees to pay as the process continues. The other primary costs are the compensation (normally hourly) of the selected arbitrator (or panel).
There are many experienced construction lawyers who are unhappy with the administrative services provided by the AAA (I am not one of them) when taking into consideration the amounts charged by the AAA to the clients. Their arguments are as follows: “I know who the good and bad arbitrators in my area are. My clients do not need to pay the huge AAA filing fees to just get a list of potential arbitrators. And once chosen, a good arbitrator takes over the administration of the arbitration and all the AAA case manager does is set up calls (when the arbitrator does not do so), collects the estimated arbitrator fees from the parties, sends out notices and pays the arbitrator.”
Because of the arguments above, and other concerns, there is a growing trend for parties and their construction lawyers, even with an arbitration clause that calls for AAA administration, to completely “bypass” the AAA and have the arbitration administered “privately.” Over the past five years, I would estimate that 33% of the arbitrations for which I have served as an arbitrator (including on a panel of 3 arbitrator) over the past 3 years have been privately administered. What this means is that the parties agree to amend the arbitration clause; enter into a private arbitration agreement (which may call for portions of the AAA Rules to apply); and agree on an arbitrator(s). There can also be an agreement to a private arbitration without a pre-existing arbitration clause. While the arbitrator’s rates will normally be the same as the rates charged by the AAA, the obvious savings to the clients is that the AAA’s initial filing fees and other charges are avoided.
On first blush, especially for large claims and counterclaims, this may look like a win-win for the clients. However, before you go off and recommend this to your clients, you better be fully aware of the risks and issues that can arise.
Avoid issues by having an agreed private arbitration agreement.
If the arbitration clause calls for AAA Rules, and the parties agree to private arbitration, there should always be a carefully well-drafted private arbitration agreement signed by the clients. It should, among other items, set forth what rules will be applicable; what pre-hearing discovery will be allowed; identify the agreed arbitrator (and at what hourly rate); outline the requirement to split the arbitrator compensation; and determine a process if, for whatever reason, the existing arbitrator must withdraw prior to the hearings. I do not agree to serve as a private arbitrator without such an agreement in place (which is where I obtain my authority to issue a binding award). Also, do not forget that such an agreement is a “contract,” and there can be clauses included that were not in the original contract, such as a prevailing party attorneys’ fees/arbitration expenses clause or even an agreement for the most convenient hearing location (not the location of the project). Last year I served as a private arbitrator on a project located in Alabama with counsel in Atlanta, Tennessee and Colorado, and the hearings were in my firm’s offices in Nashville.
Involve your client in the arbitrator selection.
In the AAA process for selecting an arbitrator, the AAA sends a list of potential arbitrators to both counsel, who then send in a confidential list to the case manager with names crossed off and an order of preference (much like jury selection). The case manager then reviews the list and appoints the arbitrator (subject to conflicts). In a private arbitration, both sides must agree on an arbitrator. In most instances, the client will not have any idea of any potential arbitrator, so the client will be heavily relying on your advice, albeit tempered by the admonition that there cannot be any guaranties on how an arbitrator might rule. Another previous blog post in this series discussed the issues of not vetting potential arbitrators. The point here is to involve your client and explain who has been suggested as the private arbitrator. Because if the agreed upon arbitrator rules against your client, despite your fantastic efforts, a losing, disgruntled client may ask (when presented with your final post-hearing invoice), “I don’t recall agreeing to this arbitrator: why did you recommend we use that guy? You told me he would call balls and strikes, and he did not.”
Managing post-arbitrator selection conflicts can be tricky.
While any potential private arbitrator will disclose any conflicts (same process as the AAA), arbitrator conflicts can come up after selection. An example would be the later disclosure of expert witnesses or fact witnesses. If that arbitrator uses or has used one side’s designated expert, there should be a disclosure. The difference is that when the AAA administers the case, if a disclosure is necessary, the arbitrator discloses to the case manager who then deals only with counsel. Under the AAA Rules, the AAA has the sole discretion to rule on whether the arbitrator can continue to serve. In a private arbitration, the arbitrator must manage the conflict directly with counsel. One solution is to designate, in the private arbitration agreement, another qualified arbitrator who is authorized by the parties to rule on any conflict.
Handle party nonpayment issues.
When the AAA administers a case, the arbitrator provides an estimate of his total compensation/expenses, and the AAA bills each side one-half of the estimate. The payments go into the AAA “bank.” The arbitrator sends invoices to the AAA, and the AAA pays the arbitrator from the deposits. The difference is if one side does not pay its share. If a AAA administered arbitration, the case manager manages it internally and does not inform the arbitrator which side has not paid. If the payment is not timely made, the arbitrator is then given the option of proceeding with the hearings or putting the arbitration on hold. The AAA does give the paying party the option to pay the other side’s portion (but most of the time this does not happen). In a private arbitration, the arbitrator is the “bank.” The pre-payments are made to her, and obviously she knows which side has or has not paid.
The bottom line is not making the mistake of allowing the “benefit” of a client not having to pay the AAA fees with the real and material issues that can occur with a private arbitration. Having good, experienced counsel on both sides helps, as well as knowing that many of the identified issues can be anticipated in a well-drafted private arbitration agreement.
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False Claims Act Liability Based on a DEI Program? Let’s Think It Through.
One of the more attention-grabbing aspects of Executive Order (“EO”) 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” is the specter of False Claims Act (“FCA”) liability for federal contractors based on their Diversity, Equity, and Inclusion (“DEI”) programs. Many workplace DEI programs have been viewed as a complement to federal anti-discrimination law—a tool for reducing the risk of discrimination lawsuits. The new administration, however, views DEI programs as a potential source of discrimination. EO 14173 proclaims that “critical and influential institutions of American society . . . have adopted and actively use dangerous, demeaning, and immoral race- and sex-based preferences under the guise of so-called ‘diversity, equity, and inclusion’ (DEI) or ‘diversity, equity, inclusion, and accessibility’ (DEIA) that can violate the civil-rights laws of this Nation.” To counteract this potential “illegal” use of DEI programs, the Trump administration is leveraging the FCA, a powerful anti-fraud statute, to enforce its policy within the federal government contractor community.
We discuss below the framework of the FCA, how it might apply to federal contractor DEI programs under the administration’s orders, and potential hurdles the government may face in pursuing FCA claims based on a contractor’s allegedly illegal DEI program. We recommend steps contractors can take to mitigate potential FCA risks when evaluating their own DEI programs.
How Does the False Claims Act Work?
The FCA creates civil monetary liability for those who submit to the government (1) a false or misleading claim or statement, (2) while knowing that the claim was false, and where (3) the false claim or statement is material to the government’s payment decision.
The courts have recognized a number of circumstances that can give rise to FCA liability. As relevant to EO 14173, the government might assert that a contractor submits a “legally false” claim when it knowingly fails to comply with a contractual or legal requirement, even if the contractor otherwise performs the services or provides the goods that are the subject of the contract. This theory posits that the contractor “impliedly certifies” its compliance with a material term or requirement at the time it submits its claim for payment.[1]
The consequences of FCA liability can be significant. The statute allows the government to recover treble damages (i.e., three times the amount that the government was harmed), plus civil penalties that attach to each false or fraudulent claim.[2] Government contractors also may find themselves facing severe collateral consequences, as a finding of FCA liability often leads to suspension and debarment proceedings, which threaten the contractor’s eligibility for future federal awards.
One of the unique features of the FCA is its whistleblower provisions, which allow a private person (or company) to file an FCA lawsuit on behalf of the government. Such qui tam lawsuits are filed in court, but under seal—i.e., not available to the public—to allow the government to investigate the claims and decide whether to participate in the whistleblower’s claims. The FCA provides strong financial incentives to would-be qui tam plaintiffs, by allowing them to share in any recovery to the government, and to recover their attorney’s fees and costs incurred in bringing the action.
Whistleblower-initiated FCA activity is on the increase. Recent data shows that nearly 1,000 qui tam actions were filed in fiscal year 2024. Further, of the $2.9 billion that the government recovered through the FCA in 2024, more than $2.4 billion resulted from qui tam cases. Whistleblowers received more than $400 million through these recoveries.
How Might Federal Contractor DEI Programs Give Rise to FCA Liability?
EO 14173 requires every government agency to include in every contract or grant award a provision confirming that the contractor understands and agrees that “its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions,” for purposes of the FCA. Those agreements must also require contractors and grantees to certify that “it does not operate any programs promoting DEI that violate any applicable federal anti-discrimination laws.” By citing the FCA and specifically invoking the element of materiality requiring certification, EO 14173 signals that the administration intends to enforce its policies through the FCA.
Once a contractor provides the certification envisioned by EO 14173,[3] the potential exists for the government or a whistleblower to initiate an FCA action on the theory that the contractor’s DEI program violates federal anti-discrimination law. Some government contractors may think they should immediately abolish their DEI programs in order to neutralize the potential risk of costly FCA investigations and litigation. But as we explain below, actually winning an FCA case on the basis that the contractor’s DEI program violates applicable federal law will not be slam dunk.
What Are Some Potential Hurdles to Proving an FCA Violation Based on a DEI Program?
The plaintiff, whether the government or a whistleblower, bears the burden of proving each element of the alleged FCA violation. The elements of falsity, scienter, and materiality could each face obstacles of proof in establishing liability based on allegedly improper DEI program.
Falsity. To establish falsity, the government must show that the defendant contractor submitted a claim for payment to the government without disclosing that its DEI program violated federal anti-discrimination laws. The government may try to argue that some portion of the contractor’s DEI program is manifestly unlawful, but federal courts are divided as to whether contemporaneous, good faith differences in interpretation related to a disputed legal question (e.g., what constitutes “illegal DEI”) are “false” under the FCA. A number of courts require that an alleged statement or “implied certification” is objectively false.
Adding to the uncertainty here, neither the EO nor the versions of the contractor certification proposed so far define key terms such as “promoting,” “DEI,” and “illegal DEI.” The administration’s apparent view that certain DEI programs violate anti-discrimination statutes, such as Title VII of the Civil Rights Act, may not receive the deference that the courts once extended to the Executive Branch.[4]
Scienter. A false statement or certification is not actionable under the FCA unless the contractor “knew”—or at a minimum, recklessly disregarded—the falsity at the time its claim was submitted. A contractor’s honestly held, good faith belief in the truthfulness of its certification is a strong defense to liability.[5] Where contractors are required already to comply with federal anti-discrimination laws, it seems likely that they hold a good faith belief that their DEI programs are consistent with, and not contrary, to those laws. We expect that the government will face significant hurdles in proving that contractors “knowingly” engaged in “illegal” DEI programs.
Materiality. While EO 14173 expressly invokes materiality language in its anticipated contract and grant provisions, that alone is insufficient to establish the materiality element under the FCA. Indeed, the Supreme Court has held specifically that a contract provision or regulation requiring compliance as an express condition of payment is not dispositive on materiality.[6] Instead, establishing the materiality element under the FCA requires consideration of a variety of factors, including whether the government continued to pay the contractor’s claims in full, knowing that there were questions as to the legality of the contractor’s DEI program. Given the demanding standard required to establish materiality, contractors should not feel pressured to readily concede this element merely because the of a DEI certification in their contracts.
What Steps Should Federal Contractors Take to Reduce Their Risk?
Despite these likely obstacles to establishing FCA liability, EO 14173 will no doubt engender FCA investigations and whistleblower complaints in the upcoming months. To prepare for the new legal landscape, contractors should take the following precautions.
Conduct a Thorough, Privileged Analysis of All Aspects of the DEI Program
Contractors may think that abolishing their DEI program will erase the FCA risk. However, the government has cautioned that those who try to hide DEI activities by “misleadingly relabeling” them,[7] will still face scrutiny. Accordingly, FCA whistleblowers may be undeterred by the absence of a specific program called DEI, particularly if such an initiative existed previously.
To be clear, even under EO 14173, it is not illegal to have a DEI program. If a contractor has such a program, now is the time to undertake a comprehensive review to ensure that it comports with current anti-discrimination laws. There are several benefits to engaging counsel to conduct this review, even if the contractor believes its DEI program is lawful. First, evaluating the program through the more critical lens of the current administration can identify any aspects that should be amended to mitigate misunderstanding and risk. Second, engaging in such a review can help establish the contractor’s good faith belief in the truthfulness of its DEI certification. Third, the review can allow a contractor to explain to the government, if necessary, the legality and business value of each element of its DEI program.
Conduct a Privileged Assessment of Public-Facing DEI Messaging
Federal contractors also should undertake a privileged review of all public-facing DEI messaging and disclosures. These can appear in various places including on a company’s website, in its SEC filings, in recruiting materials, and on intranet platforms. Again, this evaluation can identify and mitigate the risk that any portion of the DEI program appears unlawful, even if it is not in practice or substance. Changes to descriptions of a company’s DEI program or its commitments to non-discrimination should be made in consultation with counsel and appropriate internal and external stakeholders, to avoid inadvertent legal admissions or the perception that a company has abandoned its previously stated commitment to compliance with the law.
Maintain Real-Time Awareness and Develop a Strategy Regarding the Certification
Agencies already have begun sending their own versions of a DEI certification to contractors as proposed bilateral modifications to existing contracts, often with a demand for a response within just a few days. For new contracts, the government may include the new certification in a portal with other representations and certifications that a contractor must complete in connection with maintaining eligibility or submitting proposals. It is critical to anticipate, identify, and be ready for the moment when a DEI certification becomes applicable to the contractor organization. Contractors should identify the person(s) within their organization likely to receive the certification requests and provide them with instructions and training on how to respond.
We also recommend consulting legal counsel in connection with making any proposed certification. Contractors may be able to present alternative responses to agency requests, rather than immediately agreeing to an ill-defined certification. For instance, the contractor might bring the ambiguities in the certification language to the attention of the Contracting Officer, while contemporaneously memorializing the basis for the contractor’s reasonable interpretation of the ambiguous certification to assist in the defense of a future FCA claim.
Do Not Retaliate Against Employees (or Anyone) Asking Questions About the Legality of the DEI Program
In the coming months, potential whistleblowers may be sizing up whether there is a possibility for an FCA action. In so doing, they may raise questions or concerns about a contractor’s DEI program. The FCA includes anti-retaliation provisions that can expose a company to an employment lawsuit, even if a substantive FCA violation cannot be established. Anticipating how to address questions about the DEI program (and documenting such exchanges) may help avoid potential legal challenges. Contractors should also confirm that employees have multiple, safe avenues to report, and provide managers and human resources professionals with guidance for responding appropriately.
Review and Consider Updates to Internal Company Policies on DEI
Contractors should consider whether to update internal policies to reflect that they contemporaneously reviewed the requirements of EO 14173 and made efforts to comply with its directives. For instance, internal policies could be amended to more clearly state that employment decisions are based on merit and not on protected characteristics. Policies could be developed that expressly disallow race or gender-based quotas, workforce balancing, required composition of hiring panels, diverse slate policies, or DEI training relying on stereotypes. Having recently updated policies that align with the new EO may provide greater protection in the event of a government investigation, particularly if contractors can demonstrate that these new policies are subject to an internal control schedule to test for compliance.
Conclusion
We anticipate the administration will seek to vigorously enforce the requirements of EO 14173. Indeed, the EO contemplates civil compliance investigations of numerous entities ranging from publicly traded corporations to institutions of higher education. Although contractors should remain vigilant about compliance, they should also keep in mind that FCA liability for an allegedly “illegal DEI” program is not a foregone conclusion, even in the face of a certification regarding materiality. The government (or whistleblower) must still establish an FCA violation on the specific facts at issue and likely will face challenges given the many ambiguities in the EO and in the certifications and provisions proposed to date. Even a meritless FCA suit quickly dismissed, though, is something contractors will want to avoid. Thus, it is critical to undertake steps to mitigate the risk of a qui tam action.
[1] The Supreme Court acknowledged the implied false certification theory of FCA liability in Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016).
[2] 31 U.S.C. § 3729(a)(1).
[3] How the government will include this certification into all federal contracts is not yet clear. Some contractors have begun receiving proposed bilateral contract modifications with certification language (each slightly differently worded). For new contracts, the certification likely will appear on a portal along with other routine government contracts representations and certifications. It is also worth noting that, the ordered DEI certification should be subject to notice and comment rulemaking under the OFPP Act, 41 U.S.C. § 1707; yet the administration has paused rulemaking under a memorandum dated January 20, 2025 titled Regulatory Freeze Pending Review – The White House. Failure to engage in rulemaking could render the proposed DEI certifications unenforceable. See Navajo Ref. Co., L.P. v. United States, 58 Fed. Cl. 200, 209 (2003) (contract clause invalid because no notice and comment process occurred pursuant to the OFPP Act); La Gloria Oil & Gas Co. v. United States, 56 Fed. Cl. 211, 221–22 (2003) (same), abrogated on other grounds by Tesoro Hawaii Corp. v. United States, 405 F.3d 1339 (Fed. Cir. 2005).
[4] See Loper Bright Enterprises v. Raimondo, 603 U.S. 369, 412-13 (2024) (holding that courts should not defer to administrative agencies’ interpretations of statutes that are clear and unambiguous).
[5] See United States ex rel. Schutte v. SuperValu, Inc., 598 U.S.C. 739, 749 (2023) (“The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonably person may have known or believed.”).
[6] See Universal Health Servs., Inc. v. Escobar, 579 U.S. 176, 190 (2016) (“. . . not every undisclosed violation of an express condition of payment automatically triggers liability. Whether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.”).
[7] See, e.g., Ending Radical And Wasteful Government DEI Programs And Preferencing – The White House (Feb. 5, 2025; Dep’t of Justice, Office of Attorney General Memorandum (February 5, 2025).
What CMMC Level Do I Need? The Department of Defense Issues New Guidance for Determining Appropriate CMMC Compliance Level
The Department of Defense (“DOD”) recently issued new guidance outlining how it will determine Cybersecurity Maturity Model Certification (“CMMC”) levels for its solicitations and contracts. Prior to this guidance, contractors generally understood that contracts with only Federal Contract Information would require a CMMC Level 1 self-assessment; contracts with Controlled Unclassified Information would require either a CMMC Level 2 self-assessment or a CMMC Level 2 certification; and DOD contracts “supporting its most critical programs and technologies” would require a CMMC Level 3 certification. DOD’s new guidance provides additional information contractors can use to help them determine which CMMC Level they should achieve.
The Department of Defense (“DOD”) recently issued new guidance outlining how it will determine Cybersecurity Maturity Model Certification (“CMMC”) levels for its solicitations and contracts. Prior to this guidance, contractors generally understood that contracts with only Federal Contract Information (“FCI”) would require a CMMC Level 1 self-assessment; contracts with Controlled Unclassified Information (“CUI”) would require either a CMMC Level 2 self-assessment or a CMMC Level 2 certification; and DOD contracts “supporting its most critical programs and technologies” would require a CMMC Level 3 certification. DOD’s new guidance provides additional information contractors can use to help them determine which CMMC Level they should achieve.
CMMC Level 1:
DOD’s CMMC Level 1 guidance confirms what contractors have already understood: A contract will require a CMMC Level 1 self-assessment if it requires the contractor to process, store, or transmit only FCI on the contractor’s information system. Stated another way, if the contractor does not receive CUI in connection with the contract, then the contractor will only need a CMMC Level 1 self-assessment to perform the contract. Thus, contractors that have not historically received CUI when supporting DOD may be able to continue their DOD work with only a CMMC Level 1 self-assessment.
CMMC Level 2:
CMMC Level 2 is unique among the CMMC Levels because it is the only level that is bifurcated into a self-assessment and certification. DOD’s new guidance outlines which contracts will require a CMMC Level 2 self-assessment, and which contracts will require a certification.
DOD contracts will require a CMMC Level 2 certification if the contractor will receive CUI that falls under the National Archive’s “Defense Organizational Index Grouping.” Recall that the National Archives groups CUI into one of 20 overarching organizational index groups. The Defense index group consists of five types of CUI: (1) Controlled Technical Information; (2) DoD Critical Infrastructure Security Information; (3) Naval Nuclear Propulsion Information; (4) Privileged Safety Information; and (5) Unclassified Controlled Nuclear Information – Defense. Thus, contractors who receive any of these five types of CUI should expect their future contracts to require a CMMC Level 2 certification.
DOD contracts will require a CMMC Level 2 self-assessment if the contractor will only receive non-Defense CUI. That is, if a contract involves CUI, but not the five types of CUI identified above, then the contractor will only need a CMMC Level 2 self-assessment. Contractors who do not regularly receive Defense-related CUI may be able to continue their DOD work with only a CMMC Level 2 self-assessment. Note, however, that if a contractor is willing to invest the resources needed to comply with Level 2’s security requirements, then it may be worth pursuing a certification if there is any chance the contractor may wish to pursue opportunities requiring a Level 2 certification.
CMMC Level 3:
DOD’s guidance cautions officials to “avoid overuse of the CMMC Level 3 requirement.” This is consistent with past statements from DOD, which emphasized that very few contracts will require a CMMC Level 3 certification. DOD’s guidance identifies three situations when a CMMC Level 3 requirement may be appropriate: (1) contracts where the contractor will receive CUI associated with a breakthrough, unique, and/or advanced technology; (2) contracts involving a significant aggregation or compilation of CUI in a single information system or IT environment; and (3) contracts where an attack on a single information system or IT environment would result in widespread vulnerability across DOD. Contractors who regularly support contracts involving research and development of new and sensitive DOD technology or who collect significant amounts of CUI during performance should explore whether to obtain a CMMC Level 3 certification.
Overall, contractors should pursue a CMMC level that is appropriate for the types of DOD information they receive and is consistent with their future business objectives. Most important, to avoid losing out on contracting opportunities, contractors should not delay identifying and obtaining their desired CMMC level.
Safety Perspectives From the Dallas Region: Trump Executive Orders and Their Impact [Podcast]
In this inaugural episode of 2025 for our Safety Perspectives From the Dallas Region podcast series, shareholders John Surma (Houston) and Frank Davis (Dallas) discuss President Trump’s new executive orders and their impact on the Dallas region. Frank and John address staffing issues arising from the hiring freeze, explore the “fork in the road” email regarding deferred employee resignations, and examine the return-to-work executive order, among other topics.
What to Do if Your Federal Contract was Wrongfully Terminated by the Government
Government contracts often include a termination for convenience clause, generally allowing federal agencies to cancel agreements when it serves the government’s interest. While this power is fairly broad, it is not absolute — and when misused, contractors may have legal recourse. Several court cases highlight situations where termination for convenience was found to be an abuse of discretion or bad faith.
For government contractors, understanding these legal precedents can help identify improper terminations and explore possible remedies.
When Termination for Convenience Becomes Abuse of Discretion
Government Cannot Use Termination to Correct Procurement Mistakes
Case: Krygoski Constr. Co. v. United States, 94 F.3d 1537 (Fed. Cir. 1996)
Issue: The government mistakenly awarded a contract under a small business set-aside and later terminated it for convenience to fix the error.
Ruling: The court held that termination for convenience cannot be used to correct government procurement mistakes if it results in bad faith or an abuse of discretion.
Takeaway: The government cannot cancel contracts simply to undo its own errors in the bidding process.
Termination Cannot Be Used to Escape a Bad Bargain
Case: Torncello v. United States, 681 F.2d 756 (Ct. Cl. 1982)
Issue: The government terminated a contract for convenience after finding a cheaper option elsewhere.
Ruling: The court found that the government cannot use termination for convenience to walk away from an unfavorable deal.
Takeaway: Agencies cannot cancel contracts just to get a better price.
Using Termination to Favor Another Contractor May Be Unlawful
Case: TigerSwan, Inc. v. United States, 110 Fed. Cl. 336 (2013)
Issue: The plaintiff argued that the contract was terminated as a pretext to award it to another contractor.
Ruling: The court held that if termination is used to intentionally circumvent contractor rights or favor a competitor, it may constitute an abuse of discretion.
Takeaway: The government cannot manipulate contract terminations to steer awards toward preferred vendors.
Termination in Bad Faith Can Be Challenged
Case: Salsbury Indus. v. United States, 905 F.2d 1518 (Fed. Cir. 1990)
Issue: The contractor alleged bad faith in the termination decision.
Ruling: While the government generally has broad discretion, a termination in bad faith can be deemed wrongful.
Takeaway: Contractors must prove bad faith, but if successful, the termination can be overturned.
Arbitrary or Capricious Terminations Can Be Contested
Case: Caldwell & Santmyer, Inc. v. Glickman, 55 F.3d 1578 (Fed. Cir. 1995)
Issue: The contractor argued that the termination was arbitrary and not in the government’s best interest.
Ruling: The court stated that terminations for convenience must have a rational basis and cannot be arbitrary.
Takeaway: If a contractor can prove a lack of reasonable justification, they may challenge the termination.
Key Legal Principles from These Cases
Bad Faith or Pretextual Termination
The government cannot terminate a contract for convenience to avoid obligations or favor another contractor.
Arbitrary or Capricious Terminations
If a termination lacks a rational basis or is done without reasonable justification, it may be an abuse of discretion.
No Escape from a Bad Deal
The government cannot terminate a contract just because it finds a better option later.
What Can Government Contractors Do?
If a contractor believes a termination for convenience was wrongful, they may have legal remedies, including:
Claim Breach of Contract Damages
Typically, a contractor is only entitled to termination settlement costs (e.g., costs incurred before termination, reasonable profit on completed work, etc.). However, if the termination was arbitrary, capricious, or in bad faith, it may be treated as a breach of contract, allowing the contractor to seek lost profits.
Seek Contract Reinstatement
In rare cases, a court may reinstate a contract if performance is still possible.
Request an Equitable Adjustment
If part of the contract is reinstated or re-awarded, the contractor may be able to recover increased costs due to the termination and subsequent reinstatement.
Recover Attorneys’ Fees and Costs
If the contractor proves wrongful termination, they might, in limited circumstances, be entitled to legal cost reimbursement under the Equal Access to Justice Act.
Does the Sovereign Acts Doctrine Apply?
The Sovereign Acts Doctrine can shield the federal government from liability when its actions are taken in a public and general capacity (e.g., certain new legislation or wartime measures). However, if contract terminations are targeted at specific contracts rather than simply as a result of broad governmental actions, the doctrine may not apply.
So far, the Trump administration’s termination of federal contracts, although fairly widespread, has been targeted at specific types of contracts with specific agencies. As such, the government may have a difficult time establishing that its actions were not targeted at particular contracts.
Final Thoughts: Protecting Your Rights as a Government Contractor
While the government has fairly broad discretion to terminate contracts for convenience, that power is not unlimited. If termination appears pretextual, arbitrary, or in bad faith, contractors should:
Review past legal precedents
Assess with counsel whether the termination lacks a rational basis
Gather evidence to support a potential challenge
Pursue legal remedies to recover losses
By understanding their rights and legal options, government contractors may be able to protect themselves from wrongful terminations and seek just compensation.
McDermott+ Check-Up: February 14, 2025
THIS WEEK’S DOSE
Senate Confirms RFK Jr. as HHS Secretary. He was approved by a vote of 52 – 48. Sen. McConnell (R-KY) joined all Democrats in voting no.
House, Senate Budget Committees Hold Budget Resolution Markups. The House and Senate must pass a unified budget resolution for reconciliation to move forward.
Sen. Tina Smith (D-MN) Announces She Won’t Run for Reelection. This announcement comes on the heels of Sen. Gary Peters’ (D-MI) announcement that he also will not run for reelection.
House Ways & Means Health Subcommittee Holds Hearing on Modernizing Healthcare. Members and witnesses expressed concerns regarding the healthcare system.
House Oversight Healthcare Subcommittee Examines Welfare Programs. Members expressed differing views on the state of US welfare programs, including Medicaid.
House Oversight DOGE Subcommittee Holds First Hearing. The hearing discussed improper payments and fraud, with healthcare mentions focused on Medicaid.
Senate Aging Committee Examines How to Optimize Longevity. The hearing focused on how Americans can live longer, healthier lives.
Trump Nominates Additional Healthcare Personnel. The Trump administration’s US Department of Health and Human Services (HHS) and healthcare personnel continue to fill out, including a nomination for US Drug Enforcement Administration administrator.
NIH Issues Guidance Capping Indirect Costs. A federal court subsequently granted a temporary restraining order.
President Trump Issues EO to Reduce Federal Workforce. The executive order (EO) aims to drastically cut the federal workforce, including at HHS.
Legal Challenges Continue Against Trump Administration Actions. Lawsuits have been filed over health agency webpages, the federal funding freeze, and federal employee buyouts.
CONGRESS
RFK Jr. Confirmed as HHS Secretary. In a 52 – 48 Senate vote, Robert F. Kennedy (RFK) Jr. was confirmed as the next HHS secretary. All Democrats voted no, and Sen. McConnell (R-KY) was the only Republican to join them. He issued a statement explaining that he believed RFK Jr. spreads conspiracy theories and is unfit to lead HHS. Sen. McConnell also voted no on the confirmation of Tulsi Gabbard as the director of national intelligence, and on Pete Hegseth as secretary of the US Department of Defense. With RFK Jr. now officially leading HHS, we are especially attuned to the likelihood of new healthcare EOs and other administrative actions. On the same day as RFK Jr.’s confirmation, President Trump signed an EO establishing a Make America Healthy Again Commission.
The Senate will now move forward on the confirmation process for Mehmet Oz, MD, to be administrator of the Centers for Medicare and Medicaid Services (CMS). The Senate Finance Committee confirmation hearing could be scheduled as soon as early March.
House, Senate Budget Committees Hold Budget Resolution Markups. As a first step toward reconciliation, the House and Senate must pass a unified budget resolution. That process began in earnest this week when the Senate Budget Committee passed a budget resolution on a party-line vote that would bring forth a smaller reconciliation package to include immigration, defense, and energy policies. This approach is of interest to those in healthcare, because health programs could become part of the policies that help pay for this package if it moves forward. Senate Finance Chairman Crapo (R-ID) has said that the Finance Committee would likely rescind the Biden administration’s nursing home staffing regulation, which the Congressional Budget Office has scored as saving $22 billion, as his committee’s contribution to the effort.
The House Budget Committee is taking a very different approach. On February 13, it held a markup of its budget resolution, with the goal of passing one large reconciliation bill this year to address all priorities, including immigration, energy, defense, and tax cut extensions. This differs from the Senate’s intention to pass two separate reconciliation bills. The House budget resolution includes directions to the House Energy and Commerce Committee to find at least $880 billion in savings, which would likely include Medicaid reforms. The resolution passed by a party-line vote and included two Republican-led amendments. Notably, one amendment, intended to secure votes from members of the Freedom Caucus, would decrease the amount of tax cuts that could be included if $2 trillion in spending is not cut.
Senator Tina Smith (D-MN) Announces She Won’t Run for Reelection. Sen. Smith sits on the Senate Finance and HELP Committees and is active on healthcare issues. This announcement comes on the heels of Sen. Peters’ (D-MI) recent announcement that he also won’t run for reelection. These two key Democratic seats will be open for the 2026 midterm elections. Democrats and Republicans will both work to recruit top-tier candidates to enter these races.
House Ways & Means Health Subcommittee Holds Hearing on Modernizing Healthcare. The hearing included a panel of experts who discussed ways to promote healthy living, including wellness programs, early screenings, and flexible healthcare options (such as health savings accounts and individual coverage health reimbursement arrangements for small business owners). Democrats focused their questions on the recent National Institutes of Health (NIH) guidance capping indirect costs and the impact it would have on future treatments and cures, while Republicans focused on the cost of chronic conditions and their impact on the US healthcare system.
House Oversight Healthcare Subcommittee Examines Welfare Programs. During the hearing, witnesses discussed their views on safety net and welfare programs, including Medicaid, housing benefits, and nutrition programs. Republicans expressed concerns about the growth of these programs. They specifically discussed fraud, waste, and abuse in Medicaid, citing concerns over continuous enrollment and spending on illegal immigrants. They raised policies such as Medicaid block grants and work requirements as potential solutions. Democrats expressed their views that more barriers to accessing benefits should not be added, and some shared their personal experiences with welfare programs.
House Oversight DOGE Subcommittee Holds First Hearing. The newly formed subcommittee is chaired by Rep. Green (R-GA), and Rep. Stansbury (D-NM) is the ranking member. The first hearing included a panel of witnesses who discussed improper payments and fraud in federal programs. Republicans emphasized tackling waste and improper payments in federal programs, particularly Medicaid and Medicare, while Democrats highlighted the negative impact of proposed cuts on low-income and working-class people.
Senate Aging Committee Examines How to Optimize Longevity. Witnesses at the hearing discussed their concerns regarding the rise in chronic conditions and how a focus on healthy lifestyles – including eating a good diet, exercising regularly, and taking preventive efforts – could increase lifespans and improve health outcomes among older Americans. Democrats emphasized the importance of addressing social determinants of health, such as access to affordable healthcare, stable housing, financial security, and walkable communities. Republicans focused on the inefficiency of the current healthcare system, which they believe is reactive rather than preventive, and the need for more longevity-focused care.
ADMINISTRATION
Trump Nominates Additional Healthcare Personnel. President Trump nominated Gary Andres, former staff director for key House healthcare committees, and Gustav Chiarello III, an antitrust lawyer, as HHS assistant secretaries. President Trump nominated Michael Stuart, a West Virginia state senator, to be the HHS general counsel. Trump nominated Terry Cole, the secretary of public safety and homeland security for the commonwealth of Virginia, to be administrator of the US Drug Enforcement Administration, after his first pick Chad Chronister withdrew in December 2024. These nominees will all need to be confirmed by the Senate. Tom Engels returned to the Health Resources & Services Administration, a role he held for two years in the first Trump administration. Peter Nelson, formerly with the Center for American Experiment, will lead the Center for Consumer Information and Insurance Oversight, which has jurisdiction over the Affordable Care Act. These last two positions do not require Senate confirmation, and the individuals are now working in these roles.
NIH Issues Guidance Capping Indirect Costs. Late on February 7, the NIH issued guidance capping indirect cost rates for NIH award recipients at 15%. Indirect costs support grantees’ overhead and administrative costs. The guidance stated that the policy would apply to any new grants issued and to future expenses for existing grants from February 10 onward. As a justification, the NIH stated that the average indirect cost rate has been around 27% and that many organizations’ rates are higher, reaching 50% or 60%. Stakeholders issued statements opposing the policy, including hospitals, the Association of American Medical Colleges (AAMC), and lawmakers from both parties, including Sen. Collins (R-ME), the chair of the Senate Appropriations Committee.
On February 10, when the policy was supposed to go into effect, a group of 22 Democratic state attorneys general filed a federal lawsuit arguing that the change is illegal since Congress passed legislation in 2018 to prevent changes to indirect cost rates. The court granted a temporary injunction the same day, blocking the policy from going into effect in the 22 states that filed suit. AAMC subsequently joined the suit, and on February 11 the judge broadened the injunction to apply nationwide. The American Council on Education, the Association of American Universities, and the Association of Public and Land-grant Universities filed an additional federal lawsuit on February 10. This is an ongoing issue, but it is worth noting that lawmakers could advance a similar indirect costs cap in future appropriations bills or in reconciliation.
President Trump Issues EO to Reduce Federal Workforce. The EO requires agencies to implement a workforce optimization initiative, stating:
Each agency can hire no more than one employee for every four employees that depart.
Agency heads, in consultation with their DOGE team lead, must develop a hiring plan that meets the following requirements:
New career appointment hiring decisions must be made in consultation with the agency’s DOGE team lead.
If the DOGE team lead determines that a career appointment vacancy should not be filled, that vacancy may not be filled unless the agency head decides otherwise.
DOGE team leads must provide the DOGE service administrator with a monthly hiring report.
Agency heads should prepare for large-scale reductions in force, particularly in offices that perform functions not mandated by statute and include employees working in DEI initiatives.
Agency heads must submit a report identifying statutes that establish the agency, or subcomponents of the agency, as required entities. Of note, the authorization for NIH expired after 2020 and has not been reauthorized by Congress, although appropriations have continued.
COURTS
Legal Challenges Continue Against Trump Administration Actions. Lawsuits continue to be filed against actions taken by the Trump administration, including EOs and other administrative actions. In addition to the lawsuits against the NIH indirect costs guidance noted above, lawsuits have been filed in relation to the following:
Health Agency Webpages. On February 11, a federal judge issued a temporary restraining order directing HHS agencies, such as the Centers for Disease Control and Prevention and the US Food and Drug Administration, to restore certain health data on their websites.
Federal Funding Freeze. In late January, a judge blocked Office of Management and Budget (OMB) guidance ordering agencies to pause federal funding that didn’t comply with certain Trump EOs, and OMB subsequently rescinded the guidance. On February 10, a federal judge who previously ruled on the matter granted an additional motion stating that the Trump administration was violating the previous decisions and ordering agencies to restore funding.
Federal Employee Buyout. In the original deferred resignation offer, federal employees had until February 6 to make a decision. The federal judge who originally issued an order to extend the deadline issued an additional extension but then dissolved the temporary restraining order, putting the buyout back in place.
Gender Affirming Care EO. In response to a lawsuit filed by the PFLAG National, GLMA, and transgender individuals and their families, a federal judge on February 13 entered a 14-day nationwide temporary restraining order that prohibits the defendants from “conditioning or withholding federal funds on the fact that a healthcare entity or health professional provides gender affirming medical care to a patient under the age of nineteen.”
QUICK HITS
GAO Publishes Report on Medicaid Enrollment of Individuals Formerly in Foster Care. In response to a request from Senate Finance Committee Ranking Member Wyden (D-OR), the Government Accountability Office (GAO) report summarized efforts by states to enroll children who age out of foster care.
Democratic Healthcare Leaders Urge OIG to Investigate DOGE Access to Sensitive Health Information. House Energy & Commerce Committee Ranking Member Pallone (D-NJ), Senate Finance Committee Ranking Member Wyden, and House Ways & Means Committee Ranking Member Neal (D-MA) requested that the HHS Office of Inspector General (OIG) review actions taken by DOGE when accessing data at CMS and HHS. They also wrote a letter to the acting HHS secretary and acting CMS administrator seeking responses to questions about the DOGE access.
Republicans on Energy & Commerce Committee Announce Data Privacy Working Group. The group includes Vice Chair Joyce (R-PA) and Reps. Griffith (R-VA), Balderson (R-OH), Obernolte (R-CA), Fry (R-SC), Langworthy (R-NY), Kean (R-NJ), Goldman (R-TX), and Fedorchak (R-ND), and aims to explore a legislative framework on data privacy.
CMS Announces Reduction in Marketplace Navigator Funding. For the next four years, navigators will receive $10 million per year, which is a cut from $98 million in 2024. This matches the funding provided in the first Trump Administration. Read the press release here, where CMS notes this will allow the agency to focus on more effective strategies to improve Exchange outcomes and reduce premiums.
NEXT WEEK’S DIAGNOSIS
The House is in recess next week. The Senate will be in session following the President’s Day federal holiday on Monday. The Senate is expected to continue working on confirmations for cabinet secretaries and may also take up the budget resolution reported by the Senate Budget Committee. The Senate Homeland Security & Governmental Affairs Committee will hold a nomination hearing for Deputy Director of OMB nominee Dan Bishop, and the Senate Judiciary Committee will markup the HALT Fentanyl Act, which passed the House in a bipartisan vote earlier this month.
What Federal Contractors and Grant Recipients Need To Know About EO 14173’s Certification and Non-Discrimination Requirements Concerns
Executive Order (EO) 14173 “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” creates new obligations that could carry significant risks for any organization doing business with the United States federal government. Federal contractors, subcontractors and recipients of federal grant money are or will soon be subject to potential liability under the False Claims Act (FCA).
Quick Hits
EO 14173 is raising potential compliance concerns for organizations during business with the federal government under the FCA, subject to civil and criminal penalties.
Organizations doing business with the federal government now have obligations to certify that they do not operate any programs promoting diversity, equity and inclusion that violate any applicable Federal anti-discrimination laws..
These same organizations also must agree that their compliance with all federal nondiscrimination laws in any federal contract, subcontract, or grant recipient and makes that certification a “material” term for purposes of the FCA.
Organizations doing business with the federal government may want to consider steps to take to minimize compliance risks under the FCA, which can open the door to civil and criminal exposure.
EO 14173, which was signed on January 21, 2025, and other executive actions have raised questions for employers doing business with the federal government as to what programs the government may target and whether efforts to maintain compliance with still-existing federal civil rights and antidiscrimination laws could pull them within federal regulators’ crosshairs. Notably, EO 14173 appears to implicate potential civil or criminal liability for private companies and federal contractors under the FCA, one of the government’s primary tools for combating fraud against the federal government.
The FCA imposes liability on individuals or companies that defraud the federal government by making materially false or fraudulent statements to influence the government to pay out. Those statements must be material to the government’s decision to make the payment. It also includes a “qui tam” provision that allows private individuals, known as “relators” or “whistleblowers,” to file lawsuits on behalf of the government and potentially receive a portion of any recovered damages.
The U.S. Department of Justice (DOJ) has said it collected more than $2.9 billion in settlements and judgments in all fraud claims brought under the FCA in the last fiscal year ending on September 30, 2024, with more than $2.4 billion stemming from qui tam suits.
Specifically, EO 14173 states that agency heads must “include in every contract or grant award: A term requiring the contractual counterparty or grant recipient to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes” of the FCA.
That language requires organizations doing business with the government to certify that they do not have any DEI programs that are unlawful under federal antidiscrimination laws and seeks to make such a certification a material term for purposes of the FCA. Of particular concern is that such claims under the FCA could come not only from the government but also from individuals inside and outside of the organization in qui tam suits.
Next Steps
These actions put employers doing business with the federal government on notice that the new administration is empowering interested individuals, such as applicants, employees, and others to join or possibly replace traditional federal employment agencies, such as the Equal Employment Opportunity Commission (EEOC) and the Office of Federal Contract Compliance Programs (OFCCP), as watchdogs on compliance obligations.
Employers may want to review or audit all their existing DEI or Diversity, Equity, Inclusion, and Accessibility (DEIA) programs or initiatives and to determine if they align with lawful practices under applicable federal anti-discrimination laws.
Employers doing business with the federal government may also want to consider options to create active, robust, and ongoing compliance programs to assist with this new obligation and certification under the FCA. Employers may consider thorough analysis protected by the attorney-client privilege as part of these compliance programs.
DEI and Government Contractors: A High-Stakes Shift
While much of the focus on President Trump’s recent Executive Order on Ending Illegal Discrimination and Restoring Merit-Based Opportunity (the “EO”) has been on its elimination of race and sex-based affirmative action requirements for federal contractors, another provides carries even greater potential implications. The EO also introduces new contractual obligations related to diversity, equity, and inclusion (“DEI”) efforts and signals an intent to use the False Claims Act (FCA) as a tool to target government contractors for what it views as “illegal” DEI initiatives—potentially subjecting those companies to substantial financial and even criminal penalties.
Government contractors are no strangers to being test subjects for Executive policy initiatives. Past administrations have leveraged the federal government’s immense purchasing power to enforce requirements that couldn’t gain traction in Congress. From paid leave and minimum wage mandates to COVID-related requirements, federal contractors have consistently faced unique obligations and consequences that don’t apply to their non-contractor counterparts. The same practice is playing out here.
Although the exact details of the new contractual requirements are still pending, government contractors are urged to begin preparations now to minimize potential business disruptions and significant liability risk. Below is a Q&A to further clarify these developments.
Q: What exactly is this new contractual requirement?
A: The EO includes a provision stating that “[t]he head of each agency shall include in every contract or grant award:
(A) A term requiring the contractual counterparty or grant recipient to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code; and
(B) A term requiring such counterparty or recipient to certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.”
So, breaking this down, there are two components at issue. First, contractors will have to certify to the federal government that they do not operate programs “promoting DEI” that violate federal anti-discrimination laws.
Second, contractors will have to agree in their contracts – either new contracts or potentially in modifications to existing contracts – that their compliance “in all respects” with all applicable federal anti-discrimination laws is “material” to their receipt of money from the federal government.
Taken together, this means contractors, as a condition of receiving federal funds from the federal government, will have to certify that any programs they have that “promote DEI” do not violate federal anti-discrimination laws.
Q: Why is this such a big deal?
A: The reference to the U.S. Code in the EO is to a provision of the False Claims Act (“FCA”) which establishes liability for anyone who “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” (emphasis added).
So, the EO, by requiring contractors to agree that compliance with the terms of Federal anti-discrimination laws is material to the government’s payment decisions, seeks to establish that a false DEI certification will constitute a false claim under the FCA and subject the contracting entity to the FCA’s penalties.
Q: Can anyone besides the contractor be held liable for FCA violations?
A: Yes. In addition to the contractor, “any person” (e.g., an employee) who makes a false certification, statement, or record, could be individually liable for FCA violations.
Q: What kind of penalties are involved?
A: Under the FCA, those submitting false statements are subject to a civil fine between $14,308 and $28,619 per violation, as well as “3 times the amount of damages which the Government sustains because of the act of that person.”
Moreover, businesses and individuals can also be held criminally liable under the FCA. Potential penalties include prison sentences of up to 5 years, as well as fines of up to $250,000 for individuals and $500,000 for businesses for each felony offense, and $100,000 to $200,000 for misdemeanors.
Finally, as a result of an FCA violation, a contractor could face potential suspension or debarment from the federal contract award process.
Q: What damages could the government incur due to an inaccurate statement regarding a contractor’s DEI efforts?
A: It appears that the current Administration is taking the position that any decision by the federal government to make a payment to a contractor is “influenced” (that’s how “material” is defined by the FCA) by the contractor’s compliance with federal anti-discrimination laws. As a recent GSA memorandum stated: “compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code.” The EO provides that contractors will be required to agree that such compliance is a material to all payments.
It is possible the government will argue that damages should be measured based on the total value of the contract under the theory that the federal government was fraudulently induced into entering a contract, or continued to pay during the term of the contract, due to the contractor’s misrepresentation about its DEI efforts and/or compliance with anti-discrimination laws.
Q: Is there much risk here? How does the government determine if a certification is false?
A: Well, among other ways, the FCA contains a bounty program. The law permits individuals to bring what are called “qui tam” actions on behalf of the government as qui tam “relators.” To bring a qui tam suit, a plaintiff must file a complaint under seal in the name of the government. Within 60 days of receiving the complaint and any “material evidence and information,” the government must decide whether to intervene in the action or pursue the claim through an alternative remedy (such as an administrative proceeding). If the government declines to intervene in the action, it must notify the court, “in which case the person bringing the action [will] have the right to conduct the action.”
Individuals are incentivized to bring qui tam claims because they can personally receive a significant percentage – up to 30% – of the government’s total recovery.
So, employees or others with non-public information who have a basis to assert a contractor’s DEI efforts are discriminatory can bring a relator claim alleging that the contractor is promoting illegal DEI and is not in material compliance with federal anti-discrimination laws.
Q: What exactly will contractors be certifying?
A: That’s a good question and something we won’t know for sure until we see further government action. The EO isn’t clear on what “programs promoting DEI” means, though it specifically calls out “preferences,” “mandates,” and “workforce balancing” as prohibited activities.
In another Executive Order, the Administration defined “Discriminatory equity ideology” as “an ideology that treats individuals as members of preferred or disfavored groups, rather than as individuals, and minimizes agency, merit, and capability in favor of immoral generalizations.” A different Executive Order defined “DEI office” as one that is established for the purpose of “influencing hiring or employment practices at the institution with respect to race, sex, color, or ethnicity, other than through the use of color-blind and sex-neutral hiring processes.” Other statements from the Administration indicate that DEI may be considered to mean any effort that could be seen as conferring some benefit or preference based in some part on a protected characteristic. For example, in a recent statement, the White House described DEI in hiring and promotion as relating to “factors that favor some Americans over others.” In addition, on February 5, 2025, newly-appointed Attorney General Pam Bondi defined the term “illegal DEI and DEIA preferences, mandates, policies, programs” in a memorandum on “Ending Illegal DEI and DEIA Discrimination and Preferences” as “programs, initiatives, or policies that discriminate, exclude, or divide individuals based on race or sex.”
Given that the EO requires agencies to submit a plan identifying potential “regulatory action and sub-regulatory guidance” to “encourage the private sector to end illegal discrimination and preferences, including DEI,” we are likely to see agency guidance issued in the coming weeks or months that provides at least some clarity to contractors on the types of efforts that may be considered unlawful.
Q: How will contractors actually make this certification?
A: It hasn’t been announced. In the past, contractors have used the OFCCP’s Contractor Portal to certify compliance with various OFCCP obligations, but they also submit separate certifications through the Government’s SAM system.
Q: Have these changes already taken effect?
A: No. Agency heads are ordered to include the new provisions in contracts and grant awards, but the provisions do not appear to have been developed yet. Typically such provisions are developed by the Federal Acquisition Regulatory Council.
It is also important to note that the EO speaks to including the new terms in “every contract or grant award.” It is unclear whether this means the new provisions will apply only to future contracts, or if agencies will issue modifications to existing contracts as well.
Q: Are there additional risks posed by this EO?
A: Yes. Employees can bring claims under the FCA against an employer alleging they have been “discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against” because of their protected activity under the FCA, which includes taking acts in furtherance of an FCA action or other efforts to stop a violation of the FCA.
Successful claimants are entitled to remedies including (i) “reinstatement with the same seniority [the whistleblower] would have had but for the discrimination;” (ii) twice the amount of back pay and interest on the back pay; and (iii) compensation for “any special damages sustained as a result of the discrimination, including litigation costs and reasonable attorneys’ fees.”
Accordingly, federal government contractors will have to be attuned to employee complaints about DEI efforts, understanding that, in addition to other concerns, they may constitute protected activity under the FCA and create additional liability risk.
Q: What should contractors do now?
A: Contractors would be well-advised to start preparing now for this new development. At a minimum, contractors should carefully account for and evaluate their DEI programs and initiatives to determine the risks attendant to each and ensure they feel comfortable certifying that those programs are in compliance with anti-discrimination laws. Contractors should consider conducting these assessments in consultation with legal counsel to preserve privilege associated with their review.
Contractors should also be sure to inform anyone at their companies who is involved in government contracting or who may receive a modification order of the new development and instruct them to look for and notify appropriate personnel should the new term be included in a new contract or modification order to avoid a circumstance where contractors become subject to the new requirements without full organizational knowledge and awareness.
Employment Law This Week- Federal Agencies Begin Compliance Efforts Under Trump Administration [Video} [Podcast]
This week, we’re highlighting notable employment law updates from federal agencies and the courts, including the Equal Employment Opportunity Commission (EEOC), the Department of Labor (DOL), and the U.S. Court of Appeals for the Fifth Circuit.
EEOC Releases FAQs on the State of the Agency
The EEOC, under the leadership of Acting Chair Andrea Lucas, recently released answers to frequently asked questions (FAQs) following President Trump’s series of executive orders affecting the agency.
DOL Halts OFCCP Activity Under Rescinded Executive Order
Acting Secretary of Labor Vince Micone recently issued an order directing the Office of Federal Contract Compliance Programs (OFCCP) to stop all enforcement activity under rescinded Executive Order 11246.
DOL Independent Contractor Rule Paused
The Fifth Circuit recently granted the DOL’s request to delay oral arguments, and it seems likely that the independent contractor rule will be short-lived.
Final Rule Implementing ICTS Supply Chain Executive Order 13873 In Effect
On May 15, 2019, President Trump issued Executive Order 13873 – Securing the Information and Communications Technology and Services Supply Chain (“EO” or “EO 13873”). After taking comments on a proposed implementing rule, the Department of Commerce (“DOC” or “Secretary”), on the very eve of the Biden Administration taking office, issued an Interim Final Rule implementing the EO and establishing procedures for its review of transactions involving information and communications technology and services (ICTS) designed, developed, manufactured or supplied by persons owned by, controlled by or subject to the jurisdiction or direction of a “foreign adversary” that may pose undue or unacceptable risk to the US or US persons. The DOC also sought further comments on the Interim Final Rule.
Since then the DOC announced that it had initiated certain investigations under the EO and the Interim Final Rule, and there were press reports of other investigations. Despite numerous investigations however, the DOC has only issued one Final Determination pursuant to EO 13873 since adoption of the Interim Final Rule.
On December 6, 2024, nearly three years later, the DOC published its “Final Rule” guiding review of ICTS Transactions, amending and, in some cases, removing terms or concepts which experience has shown to be unnecessary, inefficient or ineffective. The Final Rule was effective February 4, 2025.
The DOC committed to continue to review its procedures and possibly consider future rulemakings to further clarify aspects of the regulations. The new Trump Administration may also bring further adjustments. To date, the new Trump Administration has not indicated that it has “paused” enforcement under the Final Rule, as it has to other areas of regulatory enforcement. (And of course, the EO on which the Final Rule is based was issued by President Trump in his first term.)
Highlights of key adjustments reflected in the Final Rule include the following:
Scope of covered ICTS transactions – First, the DOC noted that its reviews and investigations of “ICTS Transactions” have thus far involved the review of all ICTS Transactions involving the subject entity of the review, rather than individual transactions between the entity and other parties, because the provision of anyICTS by that entity was the basis of the undue or unacceptable risks. Second, the Final Rule further refines the ICTS Transactions subject to further review by listing broad technology categories to indicate that the DOC is concerned about ICTS Transactions involving:
Information and communications hardware and software
ICTS integral to data hosting, computing or storage that uses, processes or retains sensitive personal data; connected software applications
ICTS integral to critical infrastructure
ICTS integral to critical and emerging technologies
Definitional changes –In response to certain comments, the Final Rule added or clarified certain definitions. Examples:
New definition of “Dealing In” as used in the definition of “ICTS Transaction” – “The activity of buying, selling, reselling, receiving, licensing or acquiring ICTS, or otherwise doing or engaging in business involving the conveyance of ICTS.’’
New Definition of “Importation” as used in the definition of “ICTS Transaction” – ‘‘The process or activity of bringing foreign ICTS to or into the US, regardless of the means of conveyance, including via electronic transmission.’’
Revised definition of “Party or Parties to a Transaction” – ‘‘A person or persons engaged in an ICTS Transaction or class of ICTS Transactions, including but not limited to the following: designer, developer, provider, buyer, purchaser, seller, transferor, licensor, broker, acquiror, intermediary (including consignee), and end user.”
Revised definition of “Person owned by, controlled by or subject to the jurisdiction or direction of a foreign adversary” to exclude US citizens and permanent residents – A US citizen or permanent resident would not be considered a ‘‘person owned by, controlled by or subject to the jurisdiction or direction of a foreign adversary’’ merely due to dual citizenship, or residency in a country controlled by a foreign adversary.”
Revised definition of “Person owned by, controlled by or subject to the jurisdiction or direction of a foreign adversary” – “An entity may be subject to the jurisdiction of a foreign adversary if it has a principal place of business in, is headquartered in, is incorporated in or is otherwise organized under the laws of a foreign adversary or a country controlled by a foreign adversary.”
Removal of one million unit or person threshold – This Final Rule removes the previous qualification that certain ICTS Transactions that involve the use, processing or retention of sensitive personal data must include the data of more than one million US persons to be subject to review. Additionally, it removes the one-million-unit sales minimum for internet-enabled sensors, webcams or other end-point surveillance or monitoring devices; routers, modems or any other home networking device; or drones or other unmanned aerial systems. Finally, the Final Rule also removes the qualification that software designed primarily for connecting with, and communicating via the internet be in use by over one million people to be considered ICTS for the purposes of the Rule
Committee on Foreign Investment in the United States (CFIUS) exemption – The Final Rule clarifies that the DOC will not review an ICTS Transaction that is also a covered transaction or covered real estate transaction, provided that it is either under review, investigation or assessment by CFIUS or CFIUS has concluded all action under section 721 of the Defense Production Act of 1950, as amended.
10-year record keeping requirement – The Final Rule also clarifies that any records that a notified person must retain in connection with an ICTS Transaction must be retained for 10 years following issuance of a Final Determination, unless the Final Determination specifies otherwise. Previously there was no limit on the retention period.
Details on information provided in an Initial Determination –The Final Ruleprovides thatthe Initial Determination will provide parties with information regarding the factual basis supporting the DOC’s decision to either prohibit an ICTS Transaction or permit the ICTS Transaction with mitigation measures. As to publication of an Initial Determination, in consideration of the comments about publication of Initial Determinations, under the Final Rule the DOC retains discretion to publish a notice of an Initial Determination— rather than the full text of an Initial Determination—in the Federal Register.
Response and mitigation timing – TheFinal Rule does not establish a maximum timespan for imposed mitigations because the DOC continues to believe that such an across-the-board maximum would hinder the department in fully evaluating any implemented mitigations, resulting in national security vulnerabilities. The Final Rule allows an initial 30 days to respond to an Initial Determination and allows parties to seek, and the Secretary to allow for good cause shown, an extension of another 30 days. In total, parties may receive up to 60 days to respond to an Initial Determination (30 days initially with a potential 30-day extension).
Timing imposed on interagency consultation for Final Determinations – With respect to the requirement that the Secretary seek concurrence of all appropriate agency heads before issuing a Final Determination, the Secretary may presume concurrence if no response is received within 14 days from one of the appropriate agency heads or the designee of appropriate agency heads. The Final Rule also clarifies that if an agency objects to the Final Determination, the objection must be received by the Secretary within the 14 days and the objection must come from the agency’s Deputy Secretary or equivalent level.
Final Determination timeline – The Final Rule changes certain timing associated with the Final Determination process but continues to rely on the 180-day time limit despite calls to shorten the review period. To improve clarity, it revises the 180-day time limit so that it begins when a party or parties to a transaction are served a copy of an Initial Determination and grants the Secretary sole discretion to extend this timeline. The DOC refused to establish an appeals process, but reconsideration may be warranted in some cases. The Secretary is not obliged to adopt the least restrictive means to address a determined “unacceptable risk.” The Secretary is now obligated to issue a Final Determination in every case in which the Secretary has previously issued an Initial Determination. Under the Interim Final Rule, a Final Determination was only required if the Initial Determination proposed to prohibit an ICTS Transaction. Finally, Publication in the Federal Register is now mandatory in any case where there is a Final Determination, not just where it is a Final Determination prohibiting a transaction.
Penalties – The Final Rule now provides a list of activities that may lead to civil or crimination penalties. Persons can be held responsible for assisting in the violation of a Final Determination to mitigate an ICTS Transaction, through a mitigation agreement between the US Government and identified parties to an ICTS Transaction, if they have knowledge that such a mitigation agreement exists. Activities that are prohibited for those with knowledge of the existence of a mitigation agreement include aiding and abetting violations, commanding a violation, procuring a product that is prohibited and other prohibited activities. Finally, providing false information to the DOC in connection with an ICTS Transaction under review is also prohibited.
Still no licensing regime – The DOC did not establish a licensing regime for transactions (e.g., a type of pre-clearance option contemplated by the initial rule), but it is still considering the concepts related to providing licenses.
Still no blanket exempt categories – The Final Rule applies to types of ICTS transactions most affecting US national security and does not exempt categories of industries, sectors or entities.
What is next? –The new Secretary of Commerce has yet to take his position. Nothing that he said in his nomination hearing before the Senate Commerce Committee indicated that the changes in the Final Rule would be reconsidered or rescinded, or that existing investigations would be terminated. The Secretary’s further employment of the authority embodied in the Final Rule remains to be seen, as his and the Bureau of Industry Security agenda unfolds. However, it seems unlikely that this tool in securing the ICTS supply chain will be abandoned. As such, more enforcement in this area is expected.
Update on the Proposed Amendments to the Foreign Agents Registration Act Regulations
On her very first day in office, Attorney General Pam Bondi issued a sweeping memorandum laying out what the Department of Justice’s (DOJ) enforcement priorities will be going forward under her leadership. It seems that the Foreign Agents Registration Act (FARA) will not be among those priorities, or, at least, the focus of FARA criminal enforcement efforts will be much narrower than it was during not only the Biden Administration but also the first Trump Administration.
First, the Attorney General has disbanded the Foreign Influence Task Force, established in 2017 by then-FBI Director Chris Wray to counter Russia’s attempts to influence U.S. elections and undermine democratic institutions and values. (The task force later expanded its focus to include similar malign foreign influence operations by China, Iran, and other U.S. adversaries).
Second, the Corporate Enforcement Unit within the National Security Division, the DOJ division that administers FARA, has also been disbanded, and its personnel are being reassigned.
Third, and most importantly here, criminal charges will now be brought under FARA only for “alleged conduct similar to more traditional espionage by foreign government actors.” An example would be the indictment of Sue Mi Terry, a Korea expert at think tanks in Washington and New York charged with acting as an unregistered agent of the Korean government and who, among other things, allegedly passed on non-public U.S. government information to Korean intelligence officers.
Alleged conduct on the part of non-governmental foreign actors that is not similar to “traditional espionage,” for example, a foreign company’s lobbying U.S. government officials for favorable tariff treatment for its products, without registering under FARA or availing itself of the so called “commercial exemption” for those that register under the Lobbying Disclosure Act (LDA), will be dealt with by means of only “civil enforcement, regulatory initiatives, and public guidance.”
The memorandum does not address the status of the proposed amendments to FARA that were published in the Federal Register in the final weeks of the Biden Administration and that are discussed in detail here. The comment period for this notice of proposed rulemaking was set to end on March 3, 2025, after which some version of the amendments, to the extent the comments may influence them, was eventually to be finalized and enacted.
But the “Regulatory Freeze Pending Review” memorandum that President Trump issued on Inauguration Day encompasses these proposed amendments. Paragraph 3 of that memorandum calls on agencies to consider postponing, for 60 days, the effective date of “…any rules that have been issued in any manner but have not taken effect, for the purpose of reviewing any questions of fact, law, and policy that the rules may raise.” If deemed necessary and legally permissible, the postponement can be extended beyond 60 days. “Rule” is defined to include notices of proposed rulemaking.
As explained here, the most notable proposed FARA amendments would narrow the commercial exemption, making it likelier, depending of course on the facts, that an agent of a foreign company seeking to influence the U.S. government for its commercial benefit could be criminally charged under the statute for failing to register under FARA or the LDA. Such narrowing would seem to be inconsistent with the policy laid out in the Attorney General’s memorandum, and, thus, be subject to the presidential memorandum’s call for a pause of at least 60 days for DOJ to determine whether it is in fact inconsistent. It seems unlikely, then, that the commercial exemption will be narrowed by the Trump DOJ, if ever, anytime soon.