State AGs File Suit to Block Agency Actions Implementing DEI Executive Order

Attorneys general from 19 states and the District of Columbia (State AGs) recently sued to block the federal government’s implementation of Executive Order 14398, “Addressing DEI Discrimination by Federal Contractors” (Order or EO). The State AGs argue that the actions federal agencies are taking to execute the Order violate the Administrative Procedure Act (APA) because, among other reasons, the agencies subverted the statutorily required “notice and comment” process and the rule change fails to provide guidance on what is now forbidden, given existing anti-discrimination requirements. The State AGs allege that, in their capacity as federal contractors, the Order places “hundreds of contracts worth billions of dollars” at risk.

Background

As Arnold & Porter has previously covered, President Trump issued the EO on March 26, 2026. The EO directed all executive departments and agencies to add new terms to their contracts that prohibit contractors from engaging in “racially discriminatory DEI activities,” require contractors to furnish their records for government audits of DEI compliance, and require contractors to report subcontractors who may be engaging in discriminatory DEI activities. The EO also authorized contract termination, debarment, and liability under the False Claims Act (FCA) as enforcement mechanisms.

The EO is part of the Trump Administration’s broader push to curtail DEI-related practices that it considers unlawful and discriminatory. In January 2025, President Trump issued Executive Order 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” which directed agency heads to “encourage the private sector to end illegal DEI discrimination and preferences.” To implement the President’s directives, the U.S. Department of Justice (DOJ) launched a new “Civil Rights Fraud Initiative” and issued guidance on the types of DEI activities the government considers unlawful. In April 2026, DOJ announced the first-ever DEI-related FCA settlement with IBM.

The Lawsuit

In April 2026, the Federal Acquisition Regulatory Council (FAR Council) issued a memorandum to all agency procurement officers with instructions on how to implement the EO. Federal agencies then began incorporating new DEI-related terms into contracts based on the EO and the FAR Council’s guidance.

In response, on June 10, 2026, a coalition of 19 states, including Maryland, California, Illinois, Massachusetts, and New Jersey, joined by the District of Columbia, sued multiple federal agencies and officials in federal court in Maryland. According to the complaint, states hold and continually compete for federal contracts worth billions of dollars annually, and are therefore directly subject to the federal agencies’ implementing actions.

The State AGs advance two claims under the APA. First, they argue that the federal agencies’ implementing actions exceed lawful authority and contravene the statutory and regulatory rules that govern federal procurement, including:

• Failure to follow the notice-and-comment process that is statutorily required when the federal government adopts procurement policies that have a significant cost or administrative impact on contractors;
• Failure by the FAR Council to act within its statutory authority under 41 U.S.C. § 1303 when it issued an implementing memorandum that directs agencies’ procurement activities rather than merely coordinating the maintenance of the Federal Acquisition Regulation (FAR);
• Conflicts between the FAR Council’s guidance and existing FAR provisions;
• Adoption by the FAR Council and defendant agencies of a new contractual provision that misinterprets the FCA by simply declaring materiality, contradicting the Supreme Court’s materiality analysis in Universal Health Servs., Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016); and
• Failure to follow the notice-and-comment process required by the Paperwork Reduction Act, 44 U.S.C. §§ 3501-3521, when imposing reporting and recordkeeping requirements.

Second, on substance, the State AGs argue that the defendants’ implementing actions are arbitrary and capricious. The States contend that the definitions of “racially discriminatory DEI activities” and “program participation” provided in the EO and adopted by agencies are unclear and fail to provide sufficient guidance as to what activities are now prohibited, given “existing prohibitions of discrimination based on race or ethnicity.” They further argue that the defendants’ implementing actions are unsupported by “any factual basis, evidence, or analysis.” And the State AGs argue that the defendants’ implementing actions fail to satisfy the requirements of the agency change-in-position doctrine because they do not account for overlap with existing policy, do not display awareness of the government’s change in position, and do not consider reasonably obvious alternatives.

The State AGs identify several injuries flowing from their procedural and substantive claims. Most concretely, they allege increased compliance costs now that federal agencies have begun adding the new contractual terms. They also highlight how the lack of clarity in the new terms may cost the States valuable contracting opportunities “worth billions of dollars,” expose them to unduly burdensome agency requests for information, and result in additional costs associated with defending FCA claims.

The State AGs ask the court to vacate and declare unlawful the defendant agencies’ implementing actions and to enjoin defendants from further implementation of the challenged actions with respect to the States.

Takeaways

• This suit reflects the important role that State AGs serve in policing changes to federal contracting law and procedures, given states’ status as federal contractors.

• A procedural victory may prove somewhat temporary. If the State AGs prevail on their notice-and-comment arguments, the federal government could cure the defect by completing appropriate rulemaking and adopting the contract terms. But that process takes time and resources. The number of comments on a topic like this one is likely to be voluminous, and notice-and-comment rules can be vulnerable to challenge for failure to respond to comments properly.
• Parallel litigation is proceeding on a different theory. A separate suit challenging the EO primarily on First Amendment grounds is pending before the same court.

Arnold & Porter will continue to monitor these efforts as part of our State Attorneys General Investigations & Litigation Task Force. If you have any questions about this case or State AG issues more generally, please reach out to one of the authors of this Enforcement Edge post or to your existing Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2026 All Rights Reserved. This Blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.