EO 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” directs every federal agency to insert contract and grant language declaring that a recipient’s “compliance in all respects with all applicable Federal anti-discrimination laws is material to the Government’s payment decisions for purposes of the False Claims Act.” On its face, the clause appears to heighten FCA exposure for any federal contractor or grantee that affirmatively certifies compliance but in practice operates or funds DEI initiatives alleged to violate the EO.
Justice Thomas initially emphasized in Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016) that materiality turns not on contractual labels but on whether the alleged misrepresentation “goes to the very essence of the bargain.” The Supreme Court’s most recent discussion of materiality, however – most notably, Justice Thomas’s concurrence in Kousisis v. United States, 145 S. Ct. 1382 (2025) – provides defendants with a potentially powerful roadmap for attacking FCA claims predicated on non-economic, policy-based contract terms. Indeed, the Kousisis concurrence may shape both civil FCA litigation and parallel wire-fraud investigations for years to come.
Kousisis concerned criminal wire-fraud convictions premised on false certifications of compliance with the Department of Transportation’s Disadvantaged Business Enterprise (DBE) rules. While Justice Thomas expressed doubts that the government could satisfy the burden of proving the materiality of the DBE rules at issue, the Court did not need to decide this issue because defendants did not contest that their misrepresentations were material. Justice Thomas identified four indicia that a requirement – however expressly denominated “material” – may, in fact, be “minor or insubstantial” for FCA purposes:
- The requirement’s substantive disconnect from the contract’s core purpose;
- The absence of an express payment-withholding or price-adjustment mechanism tied to the requirement;
- A consistent government practice of paying claims despite knowledge of pervasive noncompliance; and
- The possibility that the requirement itself is unlawful or unconstitutional.
Applied to EO 14173, these factors could pose substantial obstacles to establishing FCA liability for certain alleged DEI violations. First, based on the contract at issue, anti-DEI conditions may bear no relation to quality, timeliness, or cost of performance. Second, the EO’s clause arguably lacks an automatic payment-withholding penalty; instead, it may contemplate only contractual remedies such as termination. Third, depending on how the relevant time period is defined, contractors may be able to develop evidence that agencies have historically continued to pay and renew contracts despite having knowledge of DEI-related activities that are inconsistent with the Order. Finally, defendants are poised to argue that excluding DEI initiatives may itself violate constitutional equal-protection principles, further undermining materiality.
Practical takeaways for government contractors and grant recipients
Contractors should begin by comparing every DEI-related representation—including equal employment opportunity statements, workforce demographic reports, and supplier-diversity plans—to specific contract or grant provisions imposed by EO 14173. Where the multiple vehicles (e.g., task orders and other transaction agreements) trigger the certification requirement imposed by EO 14173, entities must ensure that internal compliance systems capture each certification event and any subsequent deviations from that representation. In anticipation of potential FCA inquiries, contractors should preserve contemporaneous evidence demonstrating that agency officials were aware of the contractor’s DEI programs, and the agency focused primarily on cost, schedule, or technical performance—rather than DEI posture—when issuing performance evaluations or exercising options. Companies that choose to retain their DEI program despite the increased scrutiny may benefit from evidence that the government’s payments continued notwithstanding its awareness of those programs. Such evidence goes directly to Escobar materiality under the framework described in Kousisis. Despite EO 14173’s directive declaring DEI compliance “material,” the Supreme Court’s evolving materiality jurisprudence, crystallized in the Kousisis concurrence, equips contractors with potent defenses against FCA liability. To put it simply, the concurrence reaffirms that labels alone cannot convert nonessential conditions into core contractual requirements.
Nevertheless, additional legal challenges appear inevitable because the provision Justice Thomas deemed unlikely to be material in Kousisis stands in sharp contrast to the anti-DEI materiality provision introduced by EO 14173, and the federal government may operationalize the EO’s directive by crafting contracts in a way that strengthens the conclusion that compliance with federal antidiscrimination laws is material. In Kousisis, the contract at issue was a state government agreement for construction services that exceeded 1,000 pages yet contained only a single DEI-related requirement. Anticipated litigation will aim to distinguish the provision discussed in the Kousisis concurrence from the certification mandated by the EO, especially in instances where it may not be quite so clear that the provision fails to satisfy the four-part materiality test. Justice Thomas’s conclusion rested largely on the fact that the contract concerned bridge repair, and he found no substantial nexus between bridge repair and minority hiring to support a finding of materiality. Where there is a plausible argument that unlawful DEI practices bear a meaningful connection to the subject contract, it is expected that the government will seek to differentiate those contracts from Kousisis on that basis.
In light of this uncertainty, companies that may face anti-DEI allegations should adopt a proactive strategy rather than relying largely on Justice Thomas’s concurrence in Kousisis as justification for noncompliance. Given the unpredictable course of agency enforcement, contractors would be well-advised to enhance certification protocols, collect solid evidence of the government’s actual payment processes, and prepare to contest both the constitutional foundation and the material significance of any DEI prohibitions. This approach may help mitigate liability while preserving compliance in the face of evolving legal directives.
Client Alert 2025-200
