Congress enacted the False Claims Act (FCA) in 1863 in response to procurement fraud committed against the Union Army during the Civil War. As Fred Albert Shannon’s history of the Union Army recounts:
For sugar, [the government] often got sand; for coffee, rye; for leather, something no better than brown paper; for sound horses and mules, spavined beasts and dying donkeys; and for serviceable muskets and pistols, the experimental failures of sanguine inventors, or the refuse of shops and foreign armories.
163 years later, the statute’s core framework remains intact, but the conduct it targets would be unrecognizable to its drafters.
The FCA has recovered more than $85 billion since the 1986 amendments. The qui tam mechanism, which allows private citizens to file FCA lawsuits on the government’s behalf and collect a share of the recovery, is one of the most effective fraud-detection tools in federal law. The FCA has evolved well beyond “dying donkeys” and now reaches myriad contract compliance obligations, including cybersecurity and labor law. None of what follows is an argument against the FCA or the qui tam provisions.
In January 2025, Executive Order 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” directed agencies to include contract and grant terms requiring counterparties to agree that compliance with federal anti-discrimination laws is material to payment decisions for FCA purposes and to certify that they do not operate programs violating those laws. Last month, the administration took an extra step by requiring a mandatory clause in federal contracts and “contract-like instruments,” positioning the FCA as the enforcement mechanism for determining, among other things, whether a contractor’s mentorship program constitutes disparate treatment under a contractual requirement with no established meaning.
What distinguishes this application is that the government has aimed the FCA at an underlying compliance obligation too vague to support the weight the statute places on it, extending the statute beyond its intended scope in ways that should concern anyone seeking to protect this important tool.
The Executive Order
On March 26, 2026, the President issued Executive Order 14398, “Addressing DEI Discrimination by Federal Contractors.” It directs executive branch agencies and independent establishments subject to the Federal Property and Administrative Services Act (FPASA) to include a mandatory clause in contracts and “contract-like instruments,” including subcontracts and lower-tier subcontracts, prohibiting “racially discriminatory DEI activities.” The order defines this as “disparate treatment based on race or ethnicity” across recruitment, hiring, promotions, vendor agreements, program participation, and resource allocation.
Much of the clause restates contractual compliance obligations that already exist. Contractors know that their own noncompliance with a contract clause can result in termination, suspension, or debarment, and that submitting claims while knowingly noncompliant with material contract requirements creates FCA exposure. Credible evidence of a violation could also trigger mandatory disclosure obligations.
On the subcontractor side, primes are already responsible for subcontractor performance and face potential FCA liability when they have knowledge of a subcontractor’s noncompliance. When a subcontractor’s conduct provides credible evidence of a covered violation, including a civil FCA violation, it can trigger the prime’s mandatory disclosure obligations under FAR 52.203-13. What is new is the clause’s reporting threshold for subcontractor conduct that is “known or reasonably knowable” and that “may violate” the clause. Although undefined in the EO, this language appears to set a lower threshold for reporting than the mandatory disclosure “credible evidence” standard. A provision this broad is likely to encourage primes to over-report, an issue that already exists under the mandatory disclosure rule.
What is also new, and particularly relevant to the FCA, is the clause requiring contractors to acknowledge that compliance is material to the government’s payment decisions, citing 31 U.S.C. § 3729(b)(4). This language attempts to effectively bypass one of the most contentious issues of modern-day FCA litigation by requiring contractors to acknowledge materiality at the time of contract award. In addition, the Attorney General is directed not only to consider FCA actions for violations but to expedite qui tam review, a directive that, if implemented, would dramatically accelerate DOJ’s current practice of extending seal periods well beyond the statutory 60-day window.
Anti-discrimination obligations have been part of federal contracts since Executive Order 11246 in 1965. They were historically enforced through the Office of Federal Contract Compliance Programs (OFCCP) administrative compliance regime, but the current administration has rescinded EO 11246 and directed the Department of Labor, including OFCCP, to “cease and desist all investigative and enforcement activity” under it. Noncompliance with anti-discrimination requirements has theoretically always posed an FCA risk, but no administration before this one has built an enforcement structure around that theory: mandatory FCA materiality language in contracts and certifications, creation of the Civil Rights Fraud Initiative, and express direction that DOJ consider FCA actions where contractors violate federal civil rights and anti-discrimination laws. These provisions clearly signal that the government expects compliance and will use every available tool to enforce it.
The Clause’s Falsity Problem
The FCA does not define one of its core elements: falsity. What is “false” depends on the facts of each case. Yet as an essential element of an FCA violation, the threshold question is always whether the claim is, in fact, false.
There are two types of falsity in FCA cases: factual and legal. Most people are familiar with factual falsity, such as delivering a product that doesn’t work or billing for services not performed. Legal falsity, in contrast, focuses on the compliance obligations imposed on a contractor by some ancillary statutory, regulatory, or contractual requirement. Legal falsity has expanded the FCA’s reach far past its original factual-falsity roots, and in many domains that expansion has been productive.
Congress revived the statute in 1986 for the same reason it was enacted in 1863: to address concrete, provable fraud against the government. Modern extensions follow the same principle. Cybersecurity requirements such as CMMC levels and NIST controls provide clear benchmarks. A false certification of compliance with those requirements is a provable misrepresentation. The same applies to federal labor law requirements under the Davis-Bacon Act. Prevailing wages are published, payroll records are auditable, and the certification either aligns with reality or it doesn’t. This is legal falsity working as intended because the underlying obligation provides a clear standard against which a representation can be judged true or false.
The DEI clause is fundamentally different. “Disparate treatment” is a well-established concept in employment discrimination law, but the clause applies it to categories of conduct where the falsity determination defies straightforward analysis. A mentoring program that recruits from underrepresented groups. Aspirational diversity goals without quotas. Employee resource groups organized around shared backgrounds or identities. Whether any of those constitutes disparate treatment is a genuine legal question, and reasonable compliance officers may answer differently.
Even DOJ has acknowledged the difficulty of drawing this line. In Fourth Circuit litigation over EO 14173, DOJ “represented at oral argument that there is ‘absolutely’ DEI activity that falls comfortably within the confines of the law.” At the February 2026 Qui Tam Conference, Brenna Jenny, Deputy Assistant Attorney General for DOJ’s Commercial Litigation Branch, stated that enforcement targets practices that resulted in discrimination, “not merely” DEI programs, and that “promoting diversity isn’t inherently unlawful, nor is it a protective talisman.” If the government’s own lawyers concede in federal court that lawful DEI exists, and its lead enforcement official distinguishes between lawful diversity efforts and actionable discrimination, the question of where that line falls for any given program is precisely the kind of interpretive dispute the FCA is poorly suited to resolve.
In United States ex rel. Lamers v. City of Green Bay, the court found that the FCA does not resolve differences in interpretation arising from a disputed legal question. In United States v. AseraCare, Inc., the court’s position was stronger: a reasonable disagreement about a judgment call, without other evidence of objective falsehood, is not sufficient to establish falsity. To be clear, other circuits have declined to adopt AseraCare’s objective falsity requirement. In United States ex rel. Druding v. Care Alternatives, the Third Circuit rejected a categorical rule that expert disagreement defeats falsity and held that the “objective falsity” framework improperly conflated falsity with scienter. This split, however, does not save the government here. Even circuits that reject AseraCare’s framework still require the government to prove the claim is false. When the underlying obligation is a novel contractual prohibition with no interpretive case law, no agency guidance, and no enforcement history, that proof problem persists regardless of which side of the split the court takes.
The problem is not that courts cannot interpret the clause. The problem is that the FCA attaches treble damages, per-claim penalties, qui tam bounties, and reputational damage to the resolution of that interpretive question. That is disproportionate when the underlying dispute is about the legal characterization of a business practice under a standard that has never been applied.
Even If It’s False, Is It Material?
Even if the government clears the falsity threshold, it still must demonstrate that the falsehood would be capable of influencing the payment decision. In Universal Health Services, Inc. v. United States ex rel. Escobar, Justice Thomas made clear that materiality is “rigorous” and “demanding,” designed to ensure that the FCA is not a “vehicle for punishing garden-variety breaches of contract or regulatory violations.” The opinion also establishes that the government’s own designation of a requirement as material is relevant but not dispositive. The DEI clause does exactly what Escobar warned against, with statutory precision: the contractor “recognizes” that compliance is material to payment decisions “for purposes of” § 3729(b)(4). No appellate court has yet considered whether this kind of contract drafting satisfies Escobar’s materiality standard.
In United States ex rel. Petratos v. Genentech, the Third Circuit affirmed dismissal where the relator (the whistleblower plaintiff in FCA cases) effectively conceded that CMS consistently reimbursed claims with full knowledge of purported noncompliance, holding that a condition-of-payment label alone does not establish materiality. Declaring a requirement material by contract is not the same as treating it as material in practice. In contrast, United States ex rel. Badr v. Triple Canopy, Inc., shows what a strong legal falsity case looks like. The Fourth Circuit found the Government properly pled materiality where the requirement went to the essence of the contracted service: marksmanship qualifications for base security guards. The court further noted that the contractor’s “elaborate cover-up suggested that the contractor realized the materiality of the marksmanship requirement.”
Absent overt disregard for the clause’s requirements, such as the compensation-tied-to-demographics and race-restricted program patterns DOJ has flagged, FCA cases alleging DEI violations are unlikely to demonstrate Triple Canopy-level clarity. They are more likely to involve disputed characterizations of HR programs and business practices, not falsified qualification records. The distance between Triple Canopy and a contested mentoring initiative is the distance between fraud and a contract dispute.
The government’s own conduct since January 2025 may further preclude a finding of materiality the first time this is tested. The administration has signaled this enforcement priority for over fourteen months, stood up the Civil Rights Fraud Initiative in May 2025, and DOJ has reportedly opened investigations into DEI practices at specific companies. But investigations are not the payment-behavior evidence Escobar treats as probative. There appears to be no publicly reported instance of an agency refusing to pay, withholding funds, or imposing a similar penalty for noncompliance with the DEI certification requirement. Implementation of the certification regime was complicated by litigation, which provides the government with a plausible explanation for the thin public record. It is possible that there have been no allegations of noncompliance for the government to respond to, but if there have been, that gap undercuts the government’s claim that these certifications carry demonstrated payment significance in practice.
The Clause Doesn’t Reach Innocent (Or Even Negligent) Interpretations
Another essential element of the FCA is its scienter requirement: proof of actual knowledge, deliberate ignorance, or reckless disregard of the truth or falsity of a claim. Given the clause’s objectively fuzzy requirements, United States ex rel. Schutte v. SuperValu Inc. is directly relevant. At issue in SuperValu was the then-popular FCA defense of objective reasonableness. If a defendant had an objectively reasonable interpretation of its legal requirements, it could defeat the knowledge element absent authoritative agency guidance that would have warned it away from the mistaken belief. SCOTUS rejected that defense, clarifying that what matters is the defendant’s belief at the time of submitting the claim, not whether a reasonable interpretation existed afterward. Documented good-faith legal review and genuine restructuring provide a substantial defense, especially if supported by agency guidance. The same indeterminacy that makes falsity difficult to prove makes scienter harder to establish. If reasonable compliance officers disagree about what the clause requires, the government will struggle to show that a contractor knowingly disregarded a standard that no one has been able to define.
The Law Is Irrelevant When the Threat Is Enough
The government will face significant doctrinal obstacles if it tries to bring a borderline case alleging a violation of the DEI clause. Yet those obstacles are irrelevant to a contractor’s decision on what to do next quarter. The government just announced another record-breaking year for qui tam filings, now approaching 1,300 per year. Competitors, professional relators, and any employee with access to HR records or training materials are potential whistleblowers. For a company facing a choice between investigation costs, treble damages, per-claim penalties north of $28,000, and debarment exposure on one side, and canceling programs or eliminating policies that could be characterized as “DEI” on the other, the calculus is straightforward. The rational contractor complies regardless of the merits.
The government bypassed proportional contract administration tools and stacked the most severe civil and administrative remedies against an obligation that reasonable lawyers cannot agree on how to apply. And the compliance pressure is self-reinforcing. Every agency that withholds payment or takes corrective action in response to alleged noncompliance contributes to an enforcement record that the government will use as evidence of materiality in future cases. And every contractor that restructures a DEI program validates the threat, giving the government evidence that the market itself treats the requirement as consequential. The government does not need to win in court today. It needs contractors to act as though it could.
Using the FCA this way carries costs beyond the immediate policy objective. It dilutes the statute’s deterrent effect against fraud and burdens the qui tam system with cases that belong in contract administration, not fraud litigation. Every borderline DEI case that consumes DOJ resources is one in which actual fraud may not get the attention it deserves.
The government has used false compliance certifications as the basis for FCA enforcement for decades. What this administration has introduced in the DEI orders is a more aggressive step: writing FCA materiality directly into the contract clause and directing the Attorney General to consider FCA actions. If this approach proves effective, future administrations are almost certain to use it for their own policy priorities.
Each time the government aims this framework at a standard too ambiguous to support it, it risks producing doctrine that reshapes FCA enforcement well beyond the immediate context. The risk is compounded here because the government has built an enforcement regime that incentivizes qui tam filings but cannot control which cases are filed. It has the authority to dismiss meritless qui tam actions, but the administration is unlikely to dismiss cases alleging the very conduct its own executive order targets. Bad facts make bad law, and the law they make applies to every FCA case that follows, not just DEI cases. But that is a problem for the courts. For contractors, the calculation is simpler. The government does not need to win these cases. It just needs contractors to believe it might.