Dominique L. Casimir and Christina Manfredi McKinley●
Overview
Federal contractors: take notice. A significant lawsuit recently filed in the U.S. District Court for the District of Maryland challenges Executive Order (“EO”) No. 14398, “Addressing DEI Discrimination by Federal Contractors,” which President Trump issued on March 26, 2026. State of Maryland v. Hegseth, Case No. 1:26-cv-02322, was filed on June 10, 2026, by a coalition of 19 state attorneys general and the District of Columbia under the Administrative Procedure Act (“APA”). This case presents administrative law challenges that could reshape the compliance landscape for every entity that does business with the federal government, whether directly or indirectly.
The EO and Its Requirements
As we have previously covered, EO No. 14398 declares that diversity, equity, and inclusion (“DEI”) activities are “unethical and often illegal” and directs all federal agencies to include new contract terms in their contracts, subcontracts, and “contract-like instruments” barring contractors from engaging in “racially discriminatory DEI activities.” The order defines that term as “disparate treatment based on race or ethnicity in the recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or allocation or deployment of an entity’s resources.”
Section 3 of the order directs federal agencies to insert a comprehensive clause into federal contracts that requires contractors to: (1) refrain from engaging in racially discriminatory DEI activities; (2) furnish all information and reports, including access to books, records, and accounts, as requested by the Contracting Officer to enable compliance reviews; (3) flow the clause down to subcontractors at every tier including to commercial item subcontracts; (4) report any subcontractor’s known or “reasonably knowable” conduct that “may violate” the clause; (5) inform the contracting agency if a subcontractor sues the contractor regarding the validity of the clause; and (6) recognize that compliance with the clause is “material to the Government’s payment decisions” for purposes of the False Claims Act (“FCA”).
The order threatens severe consequences for violations, including contract termination, suspension or debarment, and lawsuits under the FCA.
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