UPDATE: OMB Rescinds Memo Pausing Federal Financial Assistance, But White House Asserts Funding Freeze in Executive Orders Remains Effective
Go-To Guide:
On Jan. 27, the Office of Management and Budget (OMB) issued Memorandum M-25-13 pausing funding for financial assistance programs that “may be implicated” by President Trump’s recent Executive Orders. On Jan. 28, a U.S. District Court issued an “administrative stay” enjoining “implement[ation] of OMB Memorandum M-25-13 with respect to the disbursement of Federal funds under all open awards.” On Jan. 29, OMB rescinded the Memo, but the White House press secretary asserted this change “is NOT a rescission of the federal funding freeze.”
Despite the recission, programs will still be reviewed for consistency with “Administration Priorities.”
The administration may seek to terminate awards based on a provision in OMB’s Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) that may permit agencies to terminate financial assistance awards if they “no longer effectuate[] the program goals or agency priorities.”
Pauses in funding and any future terminations may be contrary to the Congressional Budget and Impoundment Control Act of 1974 (ICA) if the president does not follow its procedures.
On Jan. 27, 2025, OMB issued Memorandum M-25-13, entitled “Temporary Pause of Agency Grant, Loan, and Other Financial Assistance Programs.” The Memo directed every federal agency to “temporarily pause all activities related to obligation or disbursement of all Federal financial assistance, and other relevant agency activities that may be implicated by [President Trump’s] executive orders, including, but not limited to, financial assistance for foreign aid, nongovernmental organizations, DEI, woke gender ideology, and the green new deal” effective at 5 p.m. EST on Jan. 28 (emphasis in original).
Lawsuits challenging the pause were immediately filed and on Jan. 28 the U.S. District Court for the District of Columbia enjoined the Trump administration from implementing OMB Memorandum M-25-13 for disbursements under open awards. The following day, OMB rescinded the Memo. The White House press secretary then issued a statement that the rescission of the OMB memo “is NOT a rescission of the federal funding freeze.” Due to this statement, a U.S. District Court judge in Rhode Island stated that he was inclined to grant a request for a temporary restraining order despite the recission of the OMB Memo.
Background
The Jan. 27 Memo stated that “[t]his temporary pause will provide the Administration time to review agency programs and determine the best uses of the funding for those programs consistent with the law and the President’s priorities.” After the initial Memo was distributed, federal agencies were directed to answer a series of questions about each program by Feb. 7, including (1) whether the program is a foreign assistance program, (2) whether the program includes “activities that impose an undue burden on the identification, development, or use of domestic energy resources,” including through the Inflation Reduction Act or Infrastructure Investment and Jobs Act, and (3) whether the funding “is implicated by the directive to end” diversity, equity, inclusion, and accessibility programs.
The Memo directed agencies to assign responsibility and oversight for each federal assistance program to a senior political appointee to ensure each program “conforms to Administration priorities.” It also instructed agencies to review pending Notices of Funding Opportunity (NOFOs) and other assistance announcements for consistency with “Administration priorities” and, “subject to program statutory authority,” to modify or withdraw announcements and cancel existing awards that conflict with those priorities “to the extent permissible by law.” The Memo indicated that agencies should initiate investigations “to identify underperforming recipients.”
The Memo would have impacted grants, cooperative agreements, loans and loan guarantees, and insurance programs, among other types of assistance, for programs ranging from the CHIPS Act to federal highway funding. On Jan. 28, OMB issued a Clarification Memo stating that “the pause does not apply across-the-board. It is expressly limited to programs, projects, and activities implicated by the President’s Executive Orders, such as ending DEI, the green new deal, and funding nongovernmental organizations that undermine the national interest.” Certain programs were specifically exempted, including Medicare, Social Security, “mandatory programs like Medicaid and SNAP,” and “[f]unds for small businesses, farmers, Pell grants, Head Start, rental assistance, and other similar programs.” The Clarification stated that if agencies are concerned that these specifically exempted programs “may implicate the President’s Executive Orders, they should consult OMB to begin to unwind these objectionable policies without a pause in the payments.”
The pause was immediately challenged in court—advocacy groups representing non-profits and small businesses filed a lawsuit in U.S. District Court for the District of Columbia on Jan. 28 challenging the pause under the Administrative Procedure Act. The same day, the judge issued an “administrative stay” enjoining the Trump administration “from implementing OMB Memorandum M-25-13 with respect to the disbursement of Federal funds under all open awards.” The Administration moved to dismiss the case on Jan. 30. A group of State Attorneys General filed a similar lawsuit in U.S. District Court in Rhode Island on Jan. 28.
After the court issued its administrative stay, on Jan. 29, OMB rescinded the Memo. The rescission memo states that any questions about implementing the president’s Executive Orders should be addressed to the appropriate agency’s general counsel. Following the recission, the White House press secretary stated that “This is NOT a rescission of the federal funding freeze” and that the president’s Executive Orders “on federal funding remain in full force and effect, and will be rigorously implemented.”
The “freeze” referenced in this statement appears to be a reference to certain Executive Orders pausing funding under various programs. For example, the “Unleashing American Energy” Executive Order provides that “[a]ll agencies shall immediately pause the disbursement of funds appropriated through the Inflation Reduction Act of 2022 (Public Law 117-169) or the Infrastructure Investment and Jobs Act (Public Law 117-58)[.]” The “Reevaluating and Realigning United States Foreign Aid” Executive Order requires agencies to “immediately pause new obligations and disbursements of development assistance funds to foreign countries and implementing non-governmental organizations, international organizations, and contractors pending reviews of such programs.” Both Executive Orders require the funding pause pending review of these programs.
Because of the White House press secretary’s statement that the funding freeze had not been rescinded, the U.S. District Court judge in Rhode Island stated he was inclined to grant the State Attorneys General’s request for a temporary restraining order despite OMB’s recission of the Memo.
The rescinded Memo repeatedly referenced “Administration Priorities,” echoing a provision in 2 C.F.R. § 200.340 (the termination provision of OMB’s Uniform Guidance for federal financial assistance) that permits agencies to terminate an award if it no longer effectuates “program goals or agency priorities” “to the extent authorized by law.” When OMB amended the Uniform Guidance last year, it clarified that, if agencies want the option of terminating awards on this basis, agencies “must clearly and unambiguously specify” that in the award’s terms and conditions. Prior to the 2024 changes, 2 C.F.R. § 200.211 required agencies to “make recipients aware, in a clear and unambiguous manner, of the termination provisions in § 200.340, including the applicable termination provisions in the Federal awarding agency’s regulations or in each Federal award.” But before the Uniform Guidance revision, § 200.340(b) stated that “[a] Federal awarding agency should clearly and unambiguously specify termination provisions applicable to each Federal award, in applicable regulations or in the award” (emphasis added).
The “pauses” the Executive Orders require and any future funding terminations may be challenged under the Congressional Budget and Impoundment Control Act of 1974 (ICA) if the administration does not follow its procedures. An “impoundment” is any action or inaction by a federal government officer or employee that precludes obligation or expenditure of budget authority. The Constitution delegates the power of the purse to Congress, and the ICA says the President cannot unilaterally withhold funds from obligation. Funds are obligated when the agency has created a definite liability for the associated amount.
The ICA permits the president to temporarily withhold funds from obligation—but not beyond the end of the fiscal year—by proposing a “deferral.” Deferrals cannot be used for policy reasons. The president may also seek the permanent cancellation of funds for fiscal policy or other reasons, including the termination of programs for which Congress has provided budget authority, by proposing a “rescission” in a “special message” that explains the rationale for the recission. If Congress enacts the proposal, the funds would no longer be available. But if Congress does not enact the rescission within 45 calendar days of continuous session after the special message’s receipt, any withheld funds must be reapportioned and made available for obligation and expenditure. Only discretionary (not mandatory) funds are subject to recissions and deferrals.
OMB’s Jan. 28 Clarification Memo stated that the pause “is not an impoundment under the Impoundment Control Act.” It said that “[t]emporary pauses are a necessary part of program implementation that have been ordered by past presidents to ensure that programs are being executed and funds spent in accordance with a new President’s policies and do not constitute impoundments.”
Takeaways
Recipients and subrecipients with awards covered by Executive Orders that pause funding should look closely at the terms and conditions of their award agreements, agency-specific implementations of the Uniform Guidance (including appeal procedures for grant disputes, to the extent the agency has them), and the authorizing statute and any implementing regulations for the programs they are working on to evaluate their options if the government suspends or terminates their awards. To the extent possible, recipients and subrecipients should also try to limit costs that were not foreseeable prior to the “pause,” as agencies may later assert these costs are unallowable.
OFCCP Welcomes New Acting Director Amidst Policy Shift
In a significant move, the Office of Federal Contract Compliance Programs (OFCCP) has appointed Michael Schloss as the new acting director and deputy director of policy. This appointment comes as part of the Trump administration’s broader strategy to reshape the agency’s mission following the issuance of executive order (EO) Ending Illegal Discrimination and Restoring Merit-Based Opportunity, which revoked EO 11246. Schloss is tasked with guiding OFCCP as it shifts focus toward enforcing Section 503 of the Rehabilitation Act and the Vietnam Era Veterans’ Readjustment Assistance Act (VEVRAA).
Quick Hits
OFCCP has appointed Michael Schloss as the new acting director and deputy director of policy, as part of the new administration’s overall strategy to reshape the agency.
Schloss previously served as director of the Office of Field Administration at the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA).
Schloss will now guide OFCCP’s focus on enforcing Section 503 of the Rehabilitation Act and VEVRAA.
Acting Director Schloss transitions to OFCCP from the U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA), where he served as Director of the Office of Field Administration. In that role he oversaw EBSA’s ten regional offices and three district offices, ensuring the execution of enforcement, outreach, education, and assistance programs related to Employee Retirement Income Security Act (ERISA) requirements. His responsibilities included overseeing fiduciary standards, prohibited transactions, and group health plan requirements, as well as coordinating efforts across EBSA’s regions and other DOL program offices. Acting Director Schloss’s background in benefits law and EBSA operations suggests he is new to OFCCP policy.
Stay tuned for further updates as the OFCCP navigates this transition under Schloss’s leadership.
Fixed Price Contracts: Government Contractors Beware
Many predict that, among other procurement and regulatory reforms, the new administration will implement policies favoring the award of fixed-price government contracts and grants. Throughout the years, the procurement pendulum has swung back and forth in favor of and against fixed-price contracting. For example, in 2017, the Department of Defense (“DoD”) implemented a preference for fixed-price contracting and required approval of cost-reimbursement contracts in excess of $25 million by the head of the contracting agency. In 2022, DoD reversed course and removed both the preference and approval requirement.
For taxpayers, fixed-price contracting may seem appealing; however, for government contractors, fixed-price contracts present significant risk. Fixed-price contracting is often criticized because it deprives the government from receiving the best solutions and performance and instead results in awards to the lowest price, technically acceptable offeror. The federal government typically prefers fixed-price contracts because of budget and funding certainty, and because a fixed-price contract assigns all performance risk to the contractor.
Absent actual or constructive changes to the contract requirements, a contractor generally is not entitled to a cost or price increase under a fixed-price contract. This applies to large and small business contractors. A large government contractor recently reported it will recognize a significant loss on fixed-price space and defense programs, which already caused the company years of losses, due to issues such as increased production costs and disruptions from a recent strike. However, the impact on small businesses that cannot absorb the level of losses of a large business can have much more dire consequences.
Contractors have limited options to mitigate the risk associated with fixed-price contracts. First, notwithstanding the fixed-price label, a contractor should seek to include in its fixed-price contract the ability to request equitable price adjustments (“EPA”) for circumstances beyond what a contractor can reasonably assume/predict. For example, while a contractor generally can make assumptions regarding supply chain risk, contractors could not reasonably assume supply chain costs or the cost of certain materials would increase as much as 25 percent or 50 percent, as occurred during the COVID pandemic. A contractor could seek inclusion of an EPA clause that is triggered only when costs exceed a high threshold, such as 25 percent. To be clear, the applicable contracting officer will resist including any sort of EPA clause in a fixed-price contract. And contractors need to be careful conditioning their quotes or proposals on inclusion of an EPA clause as their offer could be deemed non-responsive and eliminated from consideration.
Second, when possible, contractors should negotiate statements of work (“SOWs”) and Performance Work Statements (“PWS”) that include reasonable, achievable performance. For example, for research and development contracts, a contractor should never promise or guarantee successful performance. This would include guaranteeing Food and Drug Administration approval of a drug under a government grant or 100 percent completion of a project. Rather, contractors should attempt to negotiate milestones and goals that do not guarantee success. Obviously, this approach would not apply to some contracts such as construction contracts or the sale of existing products that require no development.
Third, a contractor can seek to negotiate a dollar cap on what it is required to spend to complete performance of a fixed-price contract. Yes, this sounds similar to a time and materials (“T&M”) contract, but the dollar cap in this case would go beyond the funds available under a T&M contract. At the same time, the dollar cap gives the contractor a level of certainty that failure to achieve a specific result will not drive the contractor into bankruptcy.
Many contracting officers will resist and reject the contractor requests discussed above. But contracting officers should consider that the approaches allow more companies to compete for awards, and ensures the government has access to more companies, including small businesses, willing to contract with the government. Absent such measures, competition is reduced and those that opt to compete will propose higher prices to mitigate risk. Bottom line, if the predictions are accurate and the government shifts its contracting preferences to fixed-price contracts, contractors need not immediately throw-in the towel. In most procurements, so long as a company submits a compliant offer, offerors can submit an alternative proposal that includes one or more of the approaches above. These are novel approaches that could mitigate the contractor’s risk in fixed-price contracting to more acceptable levels.
How to Successfully Transfer Your Manufacturing Plant From Mexico to the United States
President Trump’s promise to impose a new 25% tariff on goods produced in Mexico has prompted many companies to consider alternatives to their current or planned operations in Mexico. The decades following the 1994 North American Free Trade Agreement (NAFTA) saw enormous industrial investment in Mexico, especially in northern cities like Monterrey, Tijuana, Chihuahua, and Baja California.1 The benefits of producing goods in Mexico were clear – low labor costs, modest transportation costs to the United States, and reduced tariffs under NAFTA. These benefits, however, could be eclipsed by a new 25% tariff on Mexican origin goods. Companies with industrial plants that have tight profit margins are in a precarious position, so it is not surprising that many are now “looking to shift operations to the US to avoid these additional costs and reroute cargo from Mexican ports to US ports.”2
The automotive sector is a prime example of an industry that will be significantly impacted by the proposed tariffs, if implemented. The United States imported more than US$86 billion worth of motor vehicles from Mexico and more than US$63 billion of auto parts from Mexico last year, according to US Department of Commerce data, excluding December.3 This reflects the major investments automotive manufacturers and their suppliers made in Mexico in the years since NAFTA. It also reflects the extent to which Production in Mexico and the US became highly integrated, with producers in both countries (and Canada) relying on a free flow of parts and finished goods across borders. New tariffs, therefore, pose a major challenge to the status quo.
The question of whether to shift operations from Mexico to the United States requires a careful cost-benefit analysis to determine if there is an opportunity to increase profits by relocating to the United States. But, once this analysis is complete, how does one evaluate the opportunity? Proactive planning is essential. For example, when evaluating potential moves, it is important to: (1) select an ideal site that meets the utility and labor needs of the plant; (2) negotiate and maximize economic incentives; (3) conduct real estate due diligence and analyze real estate documents for the facility and its operations; (4) review the tax and corporate considerations with respect to the transaction; and (5) analyze supply chains to ensure products produced or processed in the United States will meet US country of origin standards.
For companies facing these challenges, the firm can assist in finding a successful solution. The firm has an internationally recognized Global Location Strategies practice and an experienced Policy and Regulatory practice with special capabilities in international trade regulation. We have strong relationships with federal, state, and local economic development and government officials all over the United States. This enables our clients to gain government assistance with evaluating when and where to move their operations in the United States. The firm has obtained incentives up to a billion US dollars for our clients and has assisted with finding the perfect site for our clients through our strong relationships with federal, state, and local governments and agencies.
Now is the perfect time to explore relocating to the United States, as doing so will better position your company to navigate future disruptions and obtain the best incentives possible when making use of the firms’ years of experience and success in obtaining those incentives.
Footnotes
1 The Los Angeles Times, p. 6.
2 State of the American Supply Chain, Averitt p. 2 January 9, 2025.
3 WDSU, p. 3, January 21, 2025.
President Trump Eliminates Affirmative Action for Federal Contractors and Subcontractors – What You Need to Know
On January 21, 2025, President Trump issued a broad executive order titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” which among other things, rescinded Executive Order (“EO”) 11246 – the authority underpinning affirmative action for federal contractors and subcontractors.
WHAT IS EO 11246?
EO 11246 was issued by President Lyndon B. Johnson in 1965. Under EO 11246, federal government contractors and subcontractors with at least 50 employees and a federal contract or subcontract of at least $50,000 were obligated to develop affirmative action programs, perform annual audits of the organization’s placement and pay practices, and assess their outreach and recruitment programs for underrepresented members of their workforce.
WHAT CHANGES FOR FEDERAL CONTRACTORS?
Under President Trump’s new executive order, the Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP), which had been the government’s affirmative action enforcement arm, must “immediately cease” (1) promoting “diversity,” (2) holding federal contractors and subcontractors responsible for taking “affirmative action,” and (3) “[a]llowing or encouraging [f]ederal contractors and subcontractors to engage in workforce balancing based on race, color, sex, sexual preference, religion, or national origin.” In addition, all future federal government contracts and grants must include terms by which the contractor or grant recipient certifies it is no longer carrying out DEI initiatives in violation of federal law. The order does not provide more detail on what this certification will entail.
The order revokes EO 11246 in its entirety, including a contractor’s or subcontractor’s obligation to annually develop and maintain affirmative action plans with respect to race and gender, along with the other requirements mandated by EO 11246—such as self-audits of an organization’s placement and pay practices, and certain outreach recruitment obligations. Importantly, the order permits federal contractors to phase out their affirmative action programs over the next 90 days.
Importantly, neither Section 503 of the Rehabilitation Act nor the Vietnam Era Veterans Readjustment Assistance Act (VEVRAA), nor their implementing regulations, are affected by President Trump’s order. Both statutes create their own affirmative action obligations for federal contractors and subcontractors concerning individuals with disabilities and protected veterans, respectively. However, while neither statute is explicitly mentioned, President Trump’s order does prohibit OFCCP from “promoting diversity” or “holding federal contractors and subcontractors responsible for taking ‘affirmative action,’” which arguably covers OFCCP’s authority to enforce both the Rehabilitation Act and VEVRAA in any meaningful way.
WHAT CHANGES FOR ALL EMPLOYERS?
Federal contractors and subcontractors: (1) are no longer required to comply with EO 11246 and the OFCCP’s affirmative action requirements; and (2) cannot carry out DEI initiatives that violate any applicable federal anti-discrimination laws.
Notably, President Trump’s order does not change the various laws prohibiting employment discrimination on the basis of race, color, national origin, religion, gender, gender identity, sexual orientation, pregnancy, disability, and age. However, employers can expect increased federal government scrutiny on DEI programs (including companies having diversity officers and departments) as President Trump revamps the Equal Employment Opportunity Commission (EEOC) and rolls out additional DEI restrictions.
Executive Order Covers DEI, Affirmative Action Programs in Private, Government and Educational Sectors
Highlights
A recently issued executive order seeks to end illegal DEI programs
The order bans certain federal contractor affirmative action programs and a subsequent order ends enforcement actions
Further, the order promises formal guidance to educational agencies and higher education institutions relating to affirmative action in admissions and educational programs
Among the executive orders issued this past week is an order titled Ending Illegal Discrimination and Restoring Merit-Based Opportunity. Issued late in the day on Jan. 21, 2025, the order addresses diversity, equity, and inclusion (DEI) programs in the private sector, affirmative action programs by government contractors, and affirmative action in higher education and other educational agencies.
The executive order seeks to end diversity, equity and inclusion programs and affirmative action programs that “violate the text and spirit” of civil rights laws and “undermine the traditional values of hard work, excellence, and individual achievement.”
The executive order revokes four prior executive orders stretching back to 1965, while leaving in place certain earlier orders relating to non-discrimination and equal protection.
Private Sector DEI Programs
One focus of the executive order is to encourage private sector employers to end DEI programs involving “illegal discrimination and preferences” and advance “the policy of individual initiative, excellence and hard work.” To accomplish this, the executive order requires the U.S. Attorney General, in consultation with the heads of all federal agencies, to formulate a strategic enforcement plan to:
Outline steps to deter DEI programs involving “illegal discrimination or preferences”
Identify the “most egregious and discriminatory DEI practitioners.” This includes charging each federal agency to identify up to nine businesses/organizations/institutions of higher education to target for investigation
Evaluate litigation against organizations whose DEI programs are unlawful
Identify strategies to end illegal DEI programs in the private sector and encourage compliance with federal civil rights laws
Propose potential regulatory actions or sub-regulatory guidance on the topic of DEI
The Attorney General, after consulting the heads of federal agencies, is to provide the strategic enforcement plan by May 21, 2025.
Federal Contractor Affirmative Action Programs
Perhaps the most significant part of the executive order is that it revokes Executive Order 11246, the long-standing legal authority from 1965 that requires federal contractors and subcontractors to take affirmative action with respect to the employment of women and minorities and prohibits discrimination on the basis of race, color, national origin, sex and religion. Although federal contractors are permitted to continue to comply with Executive Order 11246 through April 21, 2025, there are significant long-term implications for contractors. These include:
Federal contractors are no longer required or allowed to take “affirmative action” with respect to women and minorities.
Federal contractors are not allowed or encouraged to “engage in workforce balancing based on race, color, sex, sexual preference, religion, or national origin.” This effectively means that federal contractors will no longer set hiring goals when their workforces do not reflect the availability of women and minorities in the pools from which they recruit. Likewise, federal contractors will no longer take good faith efforts to address goals or measure progress toward goals.
Federal contractors are held to strict non-discrimination requirements, including not considering race, color, national origin, sex, sexual preference, or religion in violation of federal civil rights laws.
Federal contracts will require contractors to agree that payment under the contract is contingent upon compliance with all federal non-discrimination laws.
Federal contractors will be required to certify they do not have DEI programs that violate federal non-discrimination laws.
The Office of Federal Contract Compliance Programs (OFCCP), the agency within the Department of Labor that enforces employment laws applicable to federal contractors, will immediately cease enforcing non-discrimination and affirmative action obligations with respect to women and minorities under Executive Order 11246. In follow-up, on Jan. 24 the newly appointed Acting Secretary of Labor issued an order halting all investigations and enforcement activity relating to Executive Order 11246. Accordingly, all complaints, investigations and cases pending before OFCCP, administrative law judges and the Administrative Review Board relating to Executive Order 11246 are closed. The Department of Labor is to notify contractors with pending cases of the closure by Jan. 31, 2025.
Not affected by this executive order are federal contractors’ obligations with respect to veterans and individuals with disabilities. Because Vietnam Era Veterans’ Readjustment Assistance Act (VEVRAA) (applicable to veterans) and Section 503 (applicable to individuals with disabilities) are legislative, the executive order does not overturn those laws. Federal contractors will continue to have affirmative action and non-discrimination requirements with respect to veterans and individuals with disabilities. OFCCP may continue to enforce those laws but in accordance with the Jan. 24 order by the Acting Secretary of Labor, pending VEVRAA and Section 503 investigations and reviews are placed on hold pending further guidance.
New audits of government contractors are most certainly delayed until that guidance is issued. To commence new audits related to VEVRAA and Section 503, OFCCP will need to amend its current audit letter (scheduling letter and itemized listing). Changing the audit letter will require OFCCP to go through a notice, comment and approval process.
Affirmative Action in Education
The final prong of this executive order addresses affirmative action in educational programs. The executive order requires the Attorney General and Secretary of Education to issue joint guidance to higher education institutions and state/local agencies receiving federal funding with respect to complying with the holding of Students for Fair Admissions, Inc. v. President and Fellows of Harvard College. It is anticipated this guidance will address the use of race in admissions, scholarships, financial assistance and other aspects of the educational process.
Takeaways
In light of the executive order, employers should consider reviewing DEI programs to ensure they comply with anti-discrimination laws.
Government contractors should continue to comply with affirmative action requirements with respect to veterans and individuals with disabilities. They may continue their affirmative action programs with respect to women and minorities until April 21, 2025, but should watch for additional guidance on eliminating the affirmative action aspects of these plans, while continuing to focus on a commitment to non-discrimination.
Higher education and other educational agencies should continue to comply with the holding of Students for Fair Admissions and wait for further guidance from the Secretary of Education and Attorney General.
Biden’s Executive Order on Project Labor Agreements Violates CICA
In a recent decision, the Court of Federal Claims (COFC) ruled on bid protests filed by 12 construction companies challenging the implementation of a February 4, 2022, Executive Order 14063 that mandated the use of project labor agreements (PLAs). FAR Council implemented EO 14063 in January 2024, and it was the first executive mandate to use PLAs for all large-scale government contracts (see FAR 22.503 (Jan. 2, 2024) and FAR 22.501 (Jan. 2, 2024)). The purpose of these PLAs is to limit the prime contractor to the use of union labor to perform the subject contract. EO 14063 defines “project labor agreement” as “a pre-hire collective bargaining agreement with one or more labor organizations that establishes the terms and conditions of employment for a specific construction project and is an agreement described in 29 U.S.C. 158(f).”
Plaintiffs argued (among other things) that Biden’s EO FAR regulations violated the Competition in Contracting Act’s (CICA) “full and open competition” requirements because it served as a blanket disqualification for offerors who would otherwise be considered responsible. Citing to National Government Services, Inc. v. United States, 923 F.3d 977 (Fed. Cir. 2019), the COFC agreed that Biden’s EO violated CICA’s “full and open competition” requirements and that the PLA mandates “have no substantive performance relation to the substance of the solicitations at issue…”
The COFC further determined that the PLA did not qualify for any exceptions to the full and open competition requirement. In particular, the court looked at § 3301(a), which provides for an exception to the CICA’s “full and open competition” requirements where there are “procurement procedures otherwise expressly authorized by statute…” The COFC rejected the government’s argument that the FAR provisions fall within the “expressly authorized by statute” language of § 3301(a) and therefore no exception applied.
Particularly noteworthy in this decision was the evidence that many of the agencies that were subject to this protest conducted market research that indicated PLAs would not contribute to the economy or efficiency of the subject project, or that a PLA would reduce competition, increase costs, and create inefficiencies for contractors and procurement officials. The agencies’ 2024 implementation of the mandate ignored their own market research that had concluded PLAs would be anticompetitive. Instead, these agencies relied solely on the executive order presidential policy – which the COFC found to be arbitrary and capricious.
By February 3, 2025, the parties are to file a joint status report explaining the agencies’ plans for each solicitation moving forward.
Nevada Supreme Court Finds Want Of Personal Jurisdiction Over LLC Members
In a recent post, I questioned why personal jurisdiction was unquestioned. See Questioning Delaware’s Control Over Controlling Stockholders. Personal jurisdiction is, of course, unquestionably fundamental, as evidenced by the Nevada Supreme Court’s recent order in Rich v. Eighth Jud. Dist. Ct., Nv. S. Ct. Case No. 88278 (Jan. 8, 2025). The dispute arose from work performed by an Oklahoma based limited liability company, Jet Commercial Construction, LLC, on a fountain at the The Forum Shops in Las Vegas, Nevada. Forum Shops submitted a claim to Jet’s insurance company, which was rejected due to an exclusion in the policy. Forum Shops then sued two members of the LLC, Messrs. Rich and Sharp, for negligent misrepresentation and breach of contract. After unsuccessfully seeking dismissal for want of personal jurisdiction, the two defendants sought a writ of prohibition from the Nevada Supreme Court.
The Nevada Supreme Court issued the writ. With respect to personal jurisdiction, it explained:
Petitioners were not involved with the emails discussing the certificate of insurance, nor were they even copied on those emails. The general liability insurance application bearing Sharp’s signature was sent to Mt. Hawley in Illinois—not Nevada. And to the extent Rich purposefully availed himself of Nevada with visits to the work site and communications with Forum Shops employees, those contacts are not jurisdictionally significant because the alleged negligent misrepresentation did not arise out of or relate to those contacts. Instead, Rich’s Nevada contacts were incidental to the fountain work and settling payment issues with subcontractors.
Forum Shops also argued that Jet’s minimum contacts impute to Rich and Sharp under an alter-ego theory. The Nevada Supreme Court also rejected this contention, finding that the Forum Shops failed to go beyond the pleadings and adduce “competent evidence of essential facts” supporting alter-ego based personal jurisdiction:
Forum Shops did not produce prima-facie evidence that recognizing Jet’s LLC form promotes “fraud” or “manifest injustice,” beyond the fact that Jet’s alleged insolvency could make it difficult for Forum Shops to collect a prospective judgment. To be sure, Forum Shops failed to show the requisite “causal connection” between petitioners allegedly abusing the LLC form and Jet’s inability to pay a judgment should Forum Shops prevail on its breach of contract claim.
So once again we see that personal jurisdiction matters.
Trump DOL Signals a Back-off from Defending Independent Contractor Rule
The Trump Administration has asked the U.S. Court of Appeals for the Fifth Circuit to postpone oral argument in a lawsuit challenging President Joe Biden’s 2024 independent contractor rule.
The U.S. Department of Justice filed a motion to pause oral argument in a legal challenge brought by trucking companies in order to give the incoming leadership at the U.S. Department of Labor (DOL) a chance to review the case and determine its next steps in the litigation. The appeals court granted the motion, tabling oral argument which had been scheduled for Feb. 5, 2025. (Frisard’s Transp., LLC v. United States DOL, No. 24-30223, Jan. 24, 2025).
The 2024 independent contractor rule, issued in January 2024, revised the DOL standard for determining whether a worker is an employee or independent contractor under the FLSA. The rule, which took effect March 11, 2024, formally adopted the six-factor “economic realities” test to determine whether a worker is an employee or independent contractor. The 2024 rule also formally rescinded a 2021 independent contractor rule issued during the waning days of the first Trump Administration, which was generally considered to be more favorable to businesses seeking to utilize an independent contractor model. (See Labor Department Releases Independent Contractor Final Rule, Revising Standard.)
The case now on hold at the Fifth Circuit is one of five lawsuits challenging the 2024 independent contractor rule. (See Independent Contractor Rule Takes Effect, But Legal Challenges Mount.) So far, the DOL has been successful in defending its rule, whether based on arguments that the plaintiffs lacked standing to sue or on the merits.
In the Frisard’s case, currently on interlocutory appeal, and the leading case, a federal court in Louisiana refused to issue a temporary restraining order or preliminary injunction barring the DOL from enforcing the rule while the court considered the merits of the legal challenge. The federal court in New Mexico recently upheld the 2024 rule on the merits in another case, finding it was not arbitrary or capricious under the Administrative Procedures Act. Colt & Joe Trucking v. United States DOL, D.N.M., 2025 U.S. Dist. LEXIS 4657, Jan. 9, 2025.
In two other suits, freelance writers and editors have filed complaints contending the 2024 rule jeopardizes their preferred legal status as independent contractors. A federal court in one case held the independent contractors lack standing to challenge the rule because they are not a party subject to the regulation. Warren v. United States DOL, N.D. Ga., No. 2:24-cv-7, Oct. 7, 2024. An appeal of that dismissal is pending in the Eleventh Circuit. In the other suit, a federal magistrate recommended dismissal for the same reason. The plaintiffs in that case have filed an objection to the magistrate judge’s recommendation. Littman v. United States DOL, M.D. Tenn., No. 3:24-cv-00194, Nov. 13, 2024.
Litigation is ongoing in a Texas federal court in a case brought by business groups. Coalition for Workforce Innovation v. Walsh, E.D. Tex., No. 1:21-cv-130. That lawsuit began as a challenge to President Biden’s decision to withdraw the 2021 independent contractor rule. The plaintiffs are now challenging the 2024 independent contractor rule as well. A motion to dismiss is pending.
The Fifth Circuit has asked the parties in the Frisard’s case to report on the status of the litigation by March 25, or earlier, if possible. The Eleventh Circuit in Warren has granted the DOL’s informal request to extend the deadline to respond to the freelancers’ appeal.
It is unlikely the DOL will continue to defend the underlying merits of the rule. The new administration will likely seek a stay of any further litigation in anticipation of further rulemaking rescinding the 2024 rule. The Trump Administration may then undertake new rulemaking to restore the 2021 rule or simply allow the courts to address the issue without agency regulations.
Trump Executive Order Takes on DEI in the Workplace: Practical Considerations for Private Employers
President Trump has issued a flurry of wide-ranging executive orders intended to shake up the employment landscape. One of those orders, entitled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” (the “Executive Order”), takes aim at non-compliant DEI programs and policies. It also creates a momentous change in the federal contractor landscape by revoking Executive Order 11246, which has, for the past sixty years, served as the foundation for non-discrimination and affirmative action requirements in the federal contracting space. Although the Executive Order’s mandates are vague in many places and raise more questions than they answer, at bottom, the Executive Order appears designed to attempt to effectively stamp out DEI programs and policies in the federal workforce, while putting private sector employers on notice and pushing them to proactively modify, narrow or even end their DEI initiatives. But as we’ll discuss more below, these developments do not compel private employers to rescind their DEI programs and policies entirely; instead, employers should use the Executive Order as an opportunity to review their existing programs and policies to ensure that they (i) continue to align with their mission and organizational goals, (ii) are legally compliant in light of the change in administration, and (iii) whether subsequently modified or not, thereafter are effectively communicated to stakeholders.
What The Executive Order Says
The Executive Order explicitly orders “all executive departments and agencies . . . to terminate all discriminatory and illegal preferences, mandates, policies, programs, activities, guidance, regulations, enforcement actions, consent orders, and requirements.” In a nod to the private sector, it further orders “all agencies to enforce our longstanding civil-rights laws and to combat illegal private-sector DEI preferences, mandates, policies, programs, and activities.” The Executive Order (and other associated actions taken in the first days of this new administration) takes aim at “illegal discrimination” from several different angles.
First, it revokes executive orders and other actions from previous presidential administrations specifically intended to bolster diversity, equity and inclusion efforts (and/or affirmative action programs) in the federal workforce. Although President Trump’s directives in the federal sector are the most far-reaching and impactful (including that certain federal departments/offices will be dismantled and the employees of those departments ultimately terminated), this post remains focused on the Executive Order’s implications for private employers.
Next, the Executive Order attempts to “streamline” the federal contracting process to “comply with our civil-rights laws.” As part of this, the Executive Order revokes longstanding Executive Order 11246, issued by President Johnson in 1965, which: (i) prohibited discrimination by federal contractors against employees or applicants on the basis of race, color, religion, sex, or national origin; and (ii) created affirmative action obligations with respect to race and sex for such contractors. As a result:
The Office of Federal Contract Compliance Programs within the Department of Labor (“OFCCP”) cannot promote “diversity” (which the Executive Order does not further define), hold federal contractors and subcontractors responsible for taking “affirmative action,” or allow or encourage federal contractors and subcontracts to engage in workforce balancing based on race, color, sex, sexual preference, religion, or national origin.
Federal agency contracts and grants must include language requiring the contractor or grant recipient to certify as a material term for payment purposes that it is in compliance with all applicable federal anti-discrimination laws and that it does not operate any programs “promoting DEI that violate any applicable federal anti-discrimination laws.”
Executive Order 13279 of December 12, 2002 (Equal Protection of the Laws for Faith-Based and Community Organizations) is expanded to include race, color, sex, sexual preference, and national origin (in addition to religion), meaning federal contractors and subcontractors may not consider these characteristics in their employment, procurement, and contracting practices.
Federal contractors will have 90 days (until April 21, 2025) to phase out compliance with prior OFCCP affirmative action obligations.
The Office of Management and Budget (the “OMB”) is tasked with excising references to DEI principles (notably “under whatever name they may appear”) from federal acquisition, contracting, grants, and financial assistance procedures, with the stated purpose of “streamlin[ing] those procedures, improv[ing] speed and efficiency, lower[ing] costs, and comply[ing] with civil rights laws.” Under the Executive Order, the OMB must also terminate all mandates, requirements, programs, and activities surrounding “diversity,” “equity,” “equitable decision-making,” “equitable deployment of financial and technical assistance,” “advancing equity,” and the like.
Third, the Executive Order directs the Attorney General, in partnership with agencies and the Director of the OMB, to submit a report to the Trump Administration by May 21, 2025 with recommendations on measures to “encourage the private sector to end illegal discrimination and preferences, including DEI.” This report is expected to have the following features:
Identifying the key private sectors of “concern” for each agency (and within each sector, identifying the most “egregious” and “discriminatory” DEI practitioners);
Stating specific steps and measurements to “deter” private sector DEI programs and principles (whether specifically denominated as DEI or otherwise);
Charging each agency with identifying up to nine potential civil compliance investigations of corporations (both publicly traded and non-profit), higher education institutions (with endowments over $1 billion), foundations (with assets over $500 million), and bar and medical associations;
Identifying other strategies to encourage the private sector to end “discriminatory” DEI practices and preferences;
Identifying litigation appropriate for federal government involvement (e.g., by way of filing lawsuits, statements of interest, etc.); and
Suggesting other potential regulatory action and sub-regulatory guidance.
Lastly, the Attorney General and Secretary of State will issue guidance by May 21, 2025 to local and state educational agencies that receive federal funds, along with higher education institutions that receive federal grants or participate in the student loan assistance program under Title IV of the Higher Education Act, as to steps “required” to comply with the Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023) (“Students for Fair Admissions”) decision. That Supreme Court decision rejected the use of racial quotas in affirmative action programs used in some higher education contexts.
What Should Private Employers Do Now?
Consider a Measured Response: The Executive Order does not mandate that private employers shut down all diversity efforts, including ending diversity programs, policies and practices; it does not order the termination of staff that focus on DEI programming, or do anything remotely similar. Rather, while there is certainly a component that aims to pressure employers to do just that (or to otherwise limit their DEI programs substantially), the Executive Order more generally is aimed at ending illegal DEI practices – in other words, DEI practices that are already not legally compliant. Employers must, therefore, be even more deliberate in their compliance efforts and how they communicate about DEI in the workplace in light of this Executive Order (and the continued evolving legal and political landscape). As part of this response, employers should consider implementing regular evaluation of their DEI programs to ensure that they are thoughtful, meaningful, meet organizational objectives, and, of course, legally compliant.
Pay Close Attention To Continued Legal and Political Developments: The portion of the Executive Order aimed at providing “encouragement” to private sector employers to end discriminatory DEI practices immediately led to raised eyebrows, particularly among the wide array of private sector employers in varied industries that have long promoted programs and initiatives aimed at supporting various underrepresented groups in legally permissible ways. Applicable government guidance and judicial case law up until this point has indicated that – while there are very real limitations to employer efforts that might operate in a way that violates anti-discrimination laws (e.g., by having diversity hiring or promotion quotas) – common corporate approaches to “DEI” efforts (such as the maintenance of inclusive employee affinity groups and recruitment efforts to create candidate opportunities in underrepresented communities, etc.) have been found legally permissible where those efforts are motivated by legitimate, non-discriminatory business priorities. Employers who decided to continue to make space for DEI in their workplace will need to monitor these developments and understand: (i) how far the Trump Administration intends to go in curbing private sector DEI practices; (ii) the possibility that this Administration could seek enforcement activity (including investigations or even litigation) against employers that espouse DEI values despite longstanding legal precedent allowing for lawful initiatives; and (iii) the legal limitations on targeting private companies that are subject to federal anti-discrimination laws (such as Title VII) but which are not explicitly covered by federal government-focused executive actions (like the Executive Order). Given the lack of specific definitions and practices that the Executive Order considers prohibited, employers will need to be prepared to continue to adjust their programs and practices as the Executive Order (and any future orders and directives) is implemented by agencies and interpreted by the courts after expected legal challenges.
Redouble Focus on the Legal Viability of DEI Programs: As noted above, the Supreme Court’s 2023 Students for Fair Admissions decision squarely rejected the use of racial quotas in some education-based affirmative action programs. But racial quotas have long been held to be discriminatory in the workplace under laws like Title VII. Expecting that the Students for Fair Admissions decision would one day extend into the private sector workplace, many employers revisited their DEI programs to reconfirm and further enhance legal viability. For example, some employers have considered how to better expand recruitment efforts, including how to broaden the recruiting of previously underrepresented community members, while others looked to non-traditional approaches that focus on socioeconomic factors instead of protected categories. Some employers have also rebranded their efforts – “Access and Opportunity” instead of “Diversity, Equity, and Inclusion” for instance. The Executive Order insinuates that these rebranding efforts alone will not insulate employers from scrutiny under the order. But, regardless of the path an organization takes, there will likely be continued government and stakeholder scrutiny, and these programs, whatever their name, must be tailored appropriately to meet organizational objectives while ensuring legal compliance. For now, even under the Executive Order, efforts to increase and retain diverse representation that are appropriately focused are permissible provided they do not “violate any federal anti-discrimination laws,” which has been a legal requirement since the passage of Title VII. Employers should continue to monitor how federal law interpretation evolves, especially as President Trump appoints Commissioners to the U.S. Equal Employment Opportunity Commission (“EEOC”), the federal agency that interprets and enforces anti-discrimination laws. Notably, the Executive Order does contain a carve out that defers to the authority of executive departments and agencies, and the heads thereof, which leaves an open question as to how agencies (such as the EEOC) will go about interpreting and implementing these changes.
Review (and Reconsider) Contracts with the Federal Government: To the extent that an employer contracts with the federal government, the Executive Order indicates that programs which otherwise promote “DEI in violation of federal anti-discrimination law” will be under increased scrutiny. Though enforcement and implementation of this stated goal is yet to be seen, employers should review future contracts and grants to determine the extent of the certifications that may be required and what sort of DEI efforts employers can engage in while accurately attesting to such certifications.
Allow for the Wind Down of Federal Contractors’ Race and Sex-Based Affirmative Action Programs While Maintaining Disability and Veteran Affirmative Action Programs: Absent a successful legal challenge or some intervening guidance from OFCCP to the contrary, federal contractors with affirmative action programs that have existed under Executive Order 11246 (related to race or sex affirmative action) will need to disband those programs by April 21st. This is a seismic shift for federal contractor compliance, particularly as the Executive Order 11246 framework (and associated OFCCP regulations) have existed for decades and President Trump’s first administration left these programs untouched. Further, while the Executive Order has the effect of eliminating affirmative action programs based on race and sex, it is silent as to whether there will be any impact on affirmative action programs on the basis of disability, and the Executive Order explicitly exempts veterans from its reach. Neither is surprising given that contracting preferences based on disability and veteran status are governed by statutes, not executive orders. (The Rehabilitation Act of 1973 governs disability affirmative action and the Veterans’ Readjustment Assistance Act of 1974 governs veteran affirmative action.) Accordingly, affirmative action programs on the basis of disability or veteran status (both of which are addressed by statutes outside the scope of Executive Order 11246) may remain intact, although there are some questions around this issue given directives to federal agencies against the promotion of “diversity,” workforce balancing, or responsibility for taking “affirmative action.” Federal contractors should look to potential OFCCP guidance as to winddown efforts but also as to continued affirmative action efforts to ensure compliance.
Continue to Account for Existing Federal Anti-Discrimination Laws: While this may be obvious, we believe it worth mentioning, given some of the early market reactions to the Executive Order: federal anti-discrimination laws that apply to private employers, including Title VII, the ADA, the ADEA, and other measures, are still the law of the land and employers should make sure to reinforce their existing anti-discrimination policies and programs. Similarly, but importantly, certain employers (at present) are still required to comply with employee demographic data reporting via the federal EEO-1 process (which large employers submit in the second quarter of each year) – this compliance obligations remains unaffected by the Executive Order.
Continue to Account for State and Local Anti-Discrimination Laws: Likewise, the Executive Order does not purport to preempt state/local law obligations employers may have related to non-discrimination in the workplace. Just by way of example, although some federal contractor compensation disclosure requirements will fall away in the absence of Executive Order 11246, many states and localities have salary disclosure and wage transparency laws, some of which require employee demographic data reporting, and employers will need to continue to comply with these requirements.
Consider an Appropriate Communications Strategy: Employers continue to increasingly find themselves on the front lines of many social issues, and the issuance of the Executive Order is no exception. Employers will need to decide quickly whether and how they might address this latest development (and similar Trump-related workforce developments), both internally and externally, as public reaction has been, and is likely to remain, strong across the political spectrum. Employees, board members, investors, clients, vendors and other important business relationships may advocate for companies to take (or not take) a visible position on this issue. Employees may also wish to speak up themselves, including on employer platforms. Whether to speak and if so, what to say, should be evaluated in light of variables such as reputational risk, talent acquisition and employee retention priorities, investor sentiments, community focus, and other business interests. Of course, not speaking at all remains an option – some organizations have decided that no message is their best message in response to divisive or politically challenging issues – particularly given the blitz of these issues over the past several years and the fatigue associated with current events. But many others will speak out and due consideration should be given, and important stakeholder feedback sought, on how best to communicate on this latest development, including in a manner that adheres to the law while optimizing stakeholder relationships.
Consider the Executive Order in the Context of Corporate Disclosures: The Executive Order does not explicitly provide any direction to private employers regarding DEI practices through corporate disclosure statements. For years, many public companies that file corporate disclosure statements have voluntarily shared information about the companies’ diversity efforts, demographic statistics, and other similar information to provide investors information about the company’s human capital risks, planning and oversight. As part of the overall communication strategy, employers should work with employment and corporate disclosure counsel to ensure that the latest upcoming and future rounds of disclosures reference (or do not reference) company DEI programs appropriately and otherwise signal ongoing compliance with applicable law, particularly given the Executive Order’s directive to target publicly traded corporations for potential civil compliance investigations.
Use Legal Counsel and other Key Stakeholders as an Important Asset During This Process: Legal compliance, while of course necessary and critical, alone will not drive this process. While employers should consult legal counsel to better understand the (evolving) legal framework applicable to DEI and to ensure legally complaint DEI program design and implementation, it’s just as important that employers partner with all stakeholders, including human resources professionals, key business stakeholders (such as the C-suite and senior management, as well as the board) who can provide critical advice about what is needed to achieve the employer’s corporate mission and goals, while accounting for the current political environment around this issue.
At Long Last – The FAR CUI Rule is Here!
The wait is finally over! After more than 14 years of anticipation, the Federal Acquisition Regulation (“FAR”) Proposed Rule on Controlled Unclassified Information (“CUI”) was released on January 15, 2025 and comes as part of the Government’s broader efforts to identify, detect, and respond to ever-evolving threats targeting Federal contractors.
History and Development of the FAR CUI Proposed Rule
This rule stems from Executive Order 13556, Controlled Unclassified Information (the “CUI Executive Order”) from November 2010, which sought to address the patchwork system of marking and handling unclassified information across executive branch agencies. On September 14, 2016, the National Archives and Records Administration (“NARA”) issued a final rule (81 FR 63324) to establish a uniform policy for agencies on CUI. This rule became effective on November 14, 2016, but the CUI Program still needed to be incorporated into the acquisition process via the FAR to establish contractual requirements for Federal contractors.
In January 2017, following release of NARA’s final rule, the FAR Council introduced FAR Case 2017-016, Controlled Unclassified Information, which served as the placeholder for the current FAR CUI Proposed Rule. We saw no real developments until just this month. In the meantime, the Department of Defense (“DoD”) implemented the CUI Program for its contractors through DFARS 252.204-7012, Safeguarding Covered Defense Information and Cyber Incident Reporting. This provision requires “adequate security” for covered defense information; implements incident reporting, investigation, and preservation requirements; and includes a flow down requirement to subcontractors. The DFARS clause applies only to defense contractors and subcontractors, but serves as the model for the new FAR CUI Proposed Rule (although, as discussed below, there are significant differences).
The proposed rule has implications for all contractors that do business with the Federal government and provides guidance to clarify contractor obligations for safeguarding and handling CUI.
Key Updates and Impact on Federal Contractors
Defining and Safeguarding Controlled Unclassified Information
The proposed rule includes the standard definition of CUI as “information that the Government creates or possesses, or that an entity creates or possesses for or on behalf of the Government, that a law, regulation, or Governmentwide policy requires or permits an agency to handle using safeguarding or dissemination controls.” Key here, the proposed rule further includes a list of information that is not CUI, which includes:
Classified information;
Covered Federal information;
Information a contractor possesses and maintains in its own systems that did not come from, or was not created or possessed by or for, an executive branch agency or an entity acting for an agency (see 32 CFR 2002.4); or
Federally-funded basic and applied research in science, technology, and engineering at colleges, universities, and laboratories in accordance with National Security Decision Directive 189.
The proposed rule further requires certain safeguarding requirements for CUI held in both federal and non-federal systems as follows:
Non-federal systems/contractor information systems must be compliant with NIST SP 800-171 Rev. 2;
Contractors must comply with agency-identified security requirements for Federal information systems (derived from NIST SP 800-53);
Cloud service providers must comply with FedRAMP Moderate requirements; and
Any additional special safeguarding requirements, as applicable.
Additionally, the proposed rule includes explicit training requirements. Contractors must ensure employees have completed training on properly handling CUI prior to doing so. Contractors are required to provide evidence of employee training upon request, though such requests are expected to be limited. For example, a Contracting Officer may inquire about training after an incident. Such evidence of CUI training may include the contractor’s system security plan and/or annual employee training certificates.
New Standard Form to Identify CUI Requirements for Contracts
The proposed rule introduces a new Standard Form (“SF XXX”) to be completed by agencies that will identify CUI and define relevant handling requirements for each contract. Of note, the proposed rule states that contractors will be required to safeguard only the CUI identified in the Standard Form and offerors and contractors will not be responsible for identifying or marking unmarked or mismarked CUI not already identified in the Standard Form. However, offerors are requested and contractors are required to notify the Contracting Officer within 8 hours of discovering any unmarked CUI, mismarked CUI, or any CUI that is not identified on the Standard Form, though this is expected to be rare.
Incident Reporting and Response Requirements
The proposed rule defines a “CUI incident” as “suspected or confirmed improper access, use, disclosure, modification, or destruction of CUI, in any form or medium.” This new definition is different from the definition of “cyber incident” in DFARS 252.204-7012. Notably, the rule specifies that unmarked or mismarked CUI is not considered a CUI incident unless the mismarking or lack of marking has resulted in the mishandling or improper dissemination of the information.
Per the proposed rule, contractors must report any suspected or confirmed “CUI incident” within 8 hours of discovery.
The proposed rule includes a statement that if a contractor is determined to be at fault for an incident (for example, due to not safeguarding CUI in accordance with contract requirements), the contractor may be financially liable for government costs incurred in the response and mitigation effort.
Defining Types of Information – Covered Federal Information
Another key update in the proposed rule is an overarching change in the FAR to use the term “covered Federal information” instead of “Federal contract information,” which currently is defined in FAR 52.204-21 and used in materials underlying the DoD’s CMMC program.
The updated definition for “covered Federal information” is “information provided by or created for the Government, when that information is other than—
Simple transactional information (such as that necessary to process payments);
Information already publicly released (such as on public websites), or marked for public release, by the Government;
Federally-funded basic and applied research in science, technology, and engineering at colleges, universities, and laboratories in accordance with National Security Decision Directive 189;
Controlled unclassified information (CUI); or
Classified information.”
Covered Federal information is not required to be marked or identified by the government. However, some administrative markings (such as “draft,” “deliberative process,” “pre-decisional,” or “not for public release”) can indicate that the information is covered federal information, within the meaning of the term.
Updates Relating to Treatment of Contractor Proprietary Information
The proposed rule addresses an issue contractors have struggled with when trying to interpret CUI requirements for their internal information or information they create. This rule provides that offerors or contractors should identify and mark their bid or proposal information, proprietary business information, and/or contractor-attributional information to ensure the information is adequately protected under the proposed rule. The government will determine whether such information provided by offerors or contractors is to be protected as CUI internally or is entitled to other protections. The Standard Form will identify any contractor CUI marking requirements under the contract.
New FAR Clauses
The proposed rule introduces a new FAR solicitation provision and two new FAR clauses. Contracting officers will add the following for all solicitations and contracts, except for procurements solely for commercially available off the shelf (COTS) products:
FAR 52.204-WW, Notice of Controlled Unclassified Information Requirements: A new solicitation provision that informs offerors of requirements on restricted use of Government-provided information, appropriately identifying sensitive offeror-provided information, and procedures to notify the Government of unmarked or mismarked CUI.
FAR 52.204-XX, Controlled Unclassified Information: A new FAR clause thatwill be inserted in solicitations and contracts where the government expects the contractor will handle CUI. The clause requires contractors to comply with applicable CUI safeguarding, training, and incident response requirements and must be flowed down to subcontractors.
FAR 52.204-YY, Identifying and Reporting Information That Is Potentially Controlled Unclassified Information: A new FAR clause that will be inserted in solicitations and contracts where the agency indicates on the Standard Form that CUI is not involved in the performance of the contract. Even where CUI is not expected to be involved, contractors will have requirements to notify the government if they discover CUI during performance. This clause must be flowed down to subcontractors.
Conclusion & Next Steps
The rule is currently in the “proposed rule” phase, with a 60-day public comment period that is currently open and scheduled to close on March 17, 2025. Federal contractors, especially those not already subject to DFARS 252.204-7012 requirements, should prioritize reviewing this proposed rule and further consider submitting comments to address questions or concerns relating to these new requirements.
This proposed rule represents a significant step towards standardizing the protection of CUI across Federal agencies. All Federal contractors, beyond just those DoD contractors already subject to DFARS 252.204-7012, will be subject to these uniform cybersecurity standards. When preparing for these changes, it is crucial to stay informed and proactive in understanding the implications of the proposed rule to maintain compliance and secure contractual relationships. By doing so, Federal contractors can better navigate the evolving cybersecurity landscape and continue to fulfill obligations in a secure and efficient manner.
Sidney Howe also contributed to this article.
White House Temporarily Pauses Certain Federal Financial Assistance Programs But U.S. District Judge Pauses Pause Until February 3
On January 27, the White House ordered a temporary pause, via an internal memorandum, on certain grants and loans disbursed by the federal government in order for each federal agency to review their federal financial assistance programs to identify if any of those programs have been impacted by President Trump’s Executive Orders.1
OMB has stated that any program that is not implicated by the above-referenced Executive Orders is not subject to the funding freeze. The temporary pause was set to take effect January 28, 2025, at 5 PM EST, but was stayed by U.S. District Court Judge Loren AliKhan until February 3, 2025, at 5 PM EST. Judge AliKhan issued the stay in order to maintain the status quo while further litigation plays out. The original pause would have temporarily impacted the National Telecommunications and Information Administration’s (NTIA) Broadband, Equity, Access, and Deployment (BEAD) Program and the Federal Communications Commission’s (FCC or Commission) USF Programs, including the Lifeline Program while those programs are reviewed.
Bottom Line: The White House was set to temporarily paused federal financial assistance programs that are implicated by certain Executive Orders. However, U.S. District Court Judge AliKhan issued an administrative stay of the temporary pause until February 3, 2025, at 5 PM EST. As we await clarification from the FCC and NTIA, as well as the courts, it is unclear the extent to which this funding freeze will last if it is implemented after February 3. In the short term, it may temporarily impact the funding stream of the federal broadband programs such as the FCC’s USF Programs, the Secure Networks Act Reimbursement Program, and NTIA’s BEAD Program. But luckily for USF recipients, Universal Service Administrative Company (USAC) payments will be processed this Friday, January 31, 2025, before the temporary funding freeze is implemented. Federal agency reports are currently still due by February 10, 2025, but OMB has noted that the temporary pause for certain programs could be as short as a day depending on the agency’s ability to coordinate with OMB. Furthermore, OMB states that any payment required by law will be paid without interruption or delay.
Background
Since being sworn into office, President Trump has issued a series of executive orders covering various issues such as trade, immigration, U.S. foreign aid, energy, civil rights, and federal worker requirements, and health care. While some of the executive orders are more symbolic, others do have immediate policy impacts.
Federal Funding Freeze
The White House issued a temporary funding freeze on all federal financial assistance programs until federal agencies have determined the impact of President Trump’s Executive Orders on such programs, effective January 28, 2025, at 5 PM EST.2 Specifically, under the now-stayed White House memorandum, each federal agency is required to complete and submit a comprehensive analysis to the Office of Management and Budget (OMB) by February 10, 2025, identifying programs, projects and activities that may be implicated by any of President Trump’s Executive Orders, including “financial assistance for foreign aid, nongovernmental organizations, DEI, woke gender ideology, and the green new deal.” This temporary freeze would also apply to all activities associated with open Notices of Funding Opportunity, such as conducting merit review panels.
The White House memorandum explains that this temporary funding freeze will provide the Administration time to review federal agency programs and “best uses of the funding for those programs consistent with the law and the President’s priorities.” But before conducting their analysis, federal agencies must identify any legally mandated obligations for their assistance programs that will arise during the temporary pause and report such information to OMB. The funding freeze would remain intact for federal agencies until OMB has reviewed the submitted information and provided guidance to such agency.
Federal Agency Review
In conducting the comprehensive analysis, federal agencies for each federal financial assistance program must assign responsibility and oversight of the analysis to a senior political appointee to ensure that the financial assistance conforms to Administration priorities. In addition, each federal agency must: (1) review any currently pending programs to ensure that Administration priorities are addressed; (2) modify in accordance with Administration priorities any unpublished financial assistance announcements, subject to statutory authority; and (3) withdraw any announcements already published consistent with Administration priorities. Federal agencies have also been directed to initiate investigations when warranted to identify any underperforming federal financial assistance recipients and cancel awards that are in conflict with Administration priorities.
Exceptions
The memorandum states that OMB is allowed to grant exceptions to this temporary freeze, on a case-by-case basis, for federal agencies to issue new awards or take other actions. It is possible that the USF program and Secure Networks Act Reimbursement Program will fall under this exception. Furthermore, to the extent required by law, federal agencies would be allowed to continue certain activities such as the closeout of Federal awards, pursuant to 2 C.F.R. 200.344, or maintaining certain recording obligations.
Additional OMB Guidance
OMB issued additional guidance noting that any program not implicated by the following Executive Orders is not subject to the funding pause: (1) Protecting the American People Against Invasion (Jan. 20, 2025); (2) Reevaluating and Realigning United States Foreign Aid (Jan. 20, 2025); (3) Putting America First in International Environmental Agreements (Jan. 20, 2025); (4) Unleashing American Energy (Jan. 20, 2025); (5) Ending Radical and Wasteful Government DEI Programs and Preferencing (Jan. 20, 2025); (6) Defending Women from Gender Ideology Extremism and Restoring Biological Truth to the Federal Government (Jan. 20, 2025); and (7) Enforcing the Hyde Amendment (Jan. 24, 2025). While reports are due to OMB by February 10, 2025, from each federal agency, OMB will continue to work with federal agencies to determine whether certain federal financial assistance programs are implicated by the above-referenced Executive Orders. Thus, funding pause for a particular program could be as short as a day. OMB has already approved an undisclosed number of federal financial assistance programs to continue their funding processes even before the pause would have gone into effect.
Administrative Stay of Funding Freeze
U.S. District Court Judge AliKhan has issued an administrative stay of the White House’s temporary funding freeze that was set to be effective January 28, 2025. However, Judge AliKhan’s administrative stay will expire on February 3, 2025, at 5 PM EST. Judge AliKhan reasoned that the administrative stay was necessary to maintain the status quo while further litigation on the White House’s funding freeze is ongoing.
Nonprofit and public health organizations had argued that the funding freeze could result in devastating outcomes for people who rely on federal funds and intruded on First Amendment rights by seeking to block funding for groups that engage in DEI programs. In response, the U.S. government argued that the organizations failed to show that they needed an immediate halt to the temporary pause on federal financial assistance and that the OMB’s additional guidance alleviated concerns about cutting off essential programs. Nonetheless, Judge AliKhan ruled that the temporary pause on federal financial assistance has a “specter of irreparable harm.”
Impact on Broadband-Related Programs
We note that after President Trump’s separate Executive Order titled Unleashing American Energy, which directed federal agencies to pause Inflation Reduction Act and Infrastructure Act funding related to the energy sector, OMB provided guidance on January 21, 2025 that this Executive Order only applies to certain energy projects, not broadband-related spending. We believe further guidance will also be forthcoming from OMB and the FCC. However, it appears that the DEI Executive Order will impact Infrastructure Act programs such as NTIA’s State Digital Equity Planning Grant Program, State Digital Equity Capacity Grant Program, and Digital Equity Competitive Grant Program which all have DEI elements.
Since the BEAD Program is separately funded under the Infrastructure Act from the broadband-related State Digital Equity programs, the DEI aspects of those programs will not impact the BEAD Program. But there are certain DEI initiatives required under the BEAD NOFO, such as requiring that states and territories coordinate with their local communities, Tribal governments, and worker organizations to ensure full representation by underrepresented communities throughout the planning and deployment process, that could be impacted by NTIA’s review. At the least during any temporary funding freeze, because States and Territories are not subject to the Executive Order, state and territory broadband offices should be able to continue conducting their BEAD Program-related processes until federal funding is needed to award selected broadband projects. It is also unclear whether other NTIA programs such as the Tribal Broadband Connectivity Program will be impacted by President Trump’s Executive Orders due to what may be characterized as DEI goals. Arguably, this program is geographic based and provides benefits to anyone living on Tribal land regardless of ethnicity.
Regarding the FCC’s federal financial assistance programs, without clarification from the Commission, it is unclear how President Trump’s Executive Orders will impact the FCC’s funding programs. It is especially unclear whether programs such as the Secure Networks Act Reimbursement Program will even be subject to the funding freeze as reimbursements do not clearly fall within the federal regulation’s definition of federal financial assistance.3 However, the temporary freeze could have delayed the receipt of funds for recipients of the FCC’s USF Programs that depend on frequent disbursements from USAC given that the next one is scheduled for January 31, 2025, but such recipients got a reprieve due to the temporary stay and lasting at least until Monday, February 3.
We will provide updates as they become available.
1The listed Executive Orders include Protecting the American People Against Invasion (Jan. 20, 2025), Reevaluating and Realigning United States Foreign Aid (Jan. 20, 2025), Putting America First in International Environmental Agreements (Jan. 20, 2025), Unleashing American Energy (Jan. 20, 2025), Ending Radical and Wasteful Government DEI Programs and Preferencing (Jan. 20, 2025) (“DEI”), Defending Women from Gender Ideology Extremism and Restoring Biological Truth to the Federal Government (Jan. 20, 2025), and Enforcing the Hyde Amendment (Jan. 24, 2025).2The White House memorandum does note that this pause does not affect assistance programs that provide funds directly to individuals, such as Social Security, Medicare, Medicaid, and SNAP. In addition, funds for small businesses, farmers, Pell grants, Head Start, rental assistance, and other similar programs will not be paused.3See 2 C.F.R. 200.1 (“Federal financial assistance means: (1) Assistance that recipients or subrecipients receive or administer in the form of: (i) Grants; (ii) Cooperative agreements; (iii) Non-cash contributions or donations of property (including donated surplus property); (iv) Direct appropriations; (v) Food commodities; and (vi) Other financial assistance…”).