Federal Contractors Face New Compliance Risks, Litigation Possibilities Under DEI Executive Order

On March 26, 2026, President Trump issued an executive order titled “Addressing DEI Discrimination by Federal Contractors.” The order builds on a series of actions by the Trump administration aimed at limiting the use of diversity, equity, and inclusion (DEI) practices in federally funded activities and contracting. It creates new contractual obligations for federal contractors and subcontractors — violations of which risk termination, False Claims Act (FCA) liability, and debarment. The order relies on the Federal Property and Administrative Services Act (FPASA), a statute that authorizes the president to impose requirements governing federal procurement. The unsettled scope of FPASA, however, could make the order and its implementation vulnerable to legal challenge.

Key Provisions

The March 26 order directs federal agencies to prohibit contractors and subcontractors from engaging in “racially discriminatory DEI activities,” which the order defines as “disparate treatment based on race or ethnicity in” recruitment, employment, contracting, program participation, or resource allocation. The order requires that, within 30 days, agencies must, “to the extent permitted by law,” ensure that contracts and subcontracts include a new contractual clause barring such practices. Contractors must also provide records to demonstrate compliance and report violations by subcontractors.

Like President Trump’s January 2025 executive order on DEI issues, the new order provides that contractors must “recognize[] that compliance” with these prohibitions is “material to the Government’s payment decisions” for purposes of the FCA. But, as we have noted in our February 2025 Qui Notes Blog, contractors have good arguments that the clause’s identification of these DEI prohibitions as material is not “automatically dispositive” in the FCA materiality analysis.

The new order goes beyond the January 2025 DEI order by creating concrete enforcement and implementation mechanisms. It directs agencies — consistent with forthcoming guidance from the Office of Management and Budget (OMB) — to cancel or suspend contracts for noncompliance, and to consider debarring offending firms from future federal work. The order also calls for regulatory updates to the Federal Acquisition Regulation to implement its requirements. And it directs the Attorney General to consider bringing FCA actions (or intervening in private qui tam actions) against contractors for alleged violations.

Legal Authority and Potential Vulnerabilities

The order invokes the president’s authority under FPASA. That statute authorizes the president to issue policies or directives that he considers necessary to create an “economical and efficient system” of federal procurement, and “to prescribe policies and directives that the President considers necessary to carry out” that mandate. Presidents have relied on FPASA to impose a wide range of contractor requirements, including nondiscrimination obligations dating back decades. Yet the order’s reliance on FPASA could make it vulnerable to challenge in litigation, especially in certain jurisdictions.

President Biden used FPASA to issue several policies governing federal contractors, including one requiring that federal contractors’ employees be vaccinated for COVID-19 and another requiring contractors to pay their workers a specified minimum wage. Some courts invalidated these policies as exceeding the president’s FPASA authority.

The Ninth Circuit adopted a particularly restrictive view of the statute in a 2024 decision striking down the minimum-wage order. The court held that FPASA “does not give the President unrestrained authority to issue any procurement policy that he desires.” Instead, the president can use it only “to issue a policy that carries out an operative provision of the FPASA” — which generally control the government’s own contracting procedures, rather than contractors’ operations. The Fifth, Sixth, and Eleventh Circuits adopted similarly restrictive views in decisions striking down the vaccination mandate — with the Fifth Circuit invoking the “major questions doctrine” in doing so. The D.C. Circuit, by contrast, has long taken a broader view of the statute, which the Tenth Circuit followed in its review of the minimum-wage order.

The DEI order’s rationale — that DEI policies “cause inefficiencies, waste, and abuse within entities that engage in such practices” that are passed along to the federal government — faces headwinds in the circuits that have read the statute narrowly. The government in litigation may seek to downplay the significance of FPASA to the order — for example, by relying on federal antidiscrimination laws that may already restrict certain DEI policies as defined in the order.

The Supreme Court has never directly addressed the scope of FPASA. The closest it came was a 1979 decision involving President Lyndon B. Johnson’s anti-discrimination executive order, which President Trump rescinded in January 2025. The case ultimately turned on application of the Freedom of Information Act, and thus it was “not necessary to decide” whether FPASA authorized President Johnson’s order. More recently, the divided decisions over President Biden’s FPASA orders were mooted by the revocation of those orders, leaving no reason for the Supreme Court to weigh in. But challenges to the new DEI order could potentially produce a circuit split that would warrant Supreme Court review.

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Arnold & Porter is closely monitoring the Trump administration’s policies governing federal contractors and federal funding, as well as related litigation. If you have questions, please reach out to one of the authors of this post or your regular 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.