State AGs Increase Scrutiny of DEI Efforts and Expand FCA Enforcement as Compliance Risks Grow

State attorneys general and federal agencies are heightening scrutiny of corporate diversity, equity, and inclusion initiatives and expanding enforcement under the False Claims Act. These parallel efforts are creating new compliance challenges for contractors and funding recipients. Organizations working across multiple jurisdictions face increased risk and uncertainty as state federal priorities continue to evolve.

Recent federal policy shifts and enforcement trends have placed corporate diversity, equity, and inclusion (DEI) initiatives under increasing scrutiny. In particular, state attorneys general (AGs) are becoming more active in investigating and, in some cases, challenging corporate practices they perceive as inconsistent with anti-discrimination laws.

At the same time, federal agencies have introduced new compliance certification requirements for contractors and funding recipients that could expand potential exposure under the False Claims Act (FCA). For companies operating in multiple jurisdictions or holding contracts at both the federal and state levels, the result is a patchwork of overlapping and sometimes conflicting obligations.

This Insight examines how these developments are reshaping the compliance landscape for government contractors and grant recipients and how overlapping federal and state enforcement regimes are driving new risks under the FCA.

A CHANGING COMPLIANCE LANDSCAPE

Following the US Supreme Court’s decision in Students for Fair Admissions v. Harvard and UNC, which struck down race-conscious admissions policies, legal advocacy groups and some government officials are attempting to extend this holding to corporate DEI programs in areas such as employment, contracting, and governance. Students for Fair Admissions is a legal advocacy group that seeks to end the use of race in university admissions programs. It filed cases against Harvard University and the University of North Carolina at Chapel Hill (UNC). In a 6–3 decision split along ideological lines, the Court held that Harvard and UNC’s race-conscious admissions policies fail strict scrutiny and thus violated the Equal Protection Clause of the Fourteenth Amendment.

Since then, there has been a rise in so-called “reverse discrimination” lawsuits (e.g., alleging race discrimination against a plaintiff because they are white), while the US Department of Justice (DOJ), state AGs, and the US Equal Employment Opportunity Commission (EEOC) have sought information on programs that reference protected characteristics in the employment context.

The 2024 Supreme Court decision in Muldrow v. City of St. Louis further expanded potential liability by holding that an employee claiming discrimination need only show “some harm” tied to an identifiable term or condition of employment, not significant harm. The EEOC has suggested that this lower threshold could implicate mentorship, sponsorship, internship, or training programs that take race, gender, or other protected characteristics into account, as well as diverse slate policies or compensation incentives tied to representation goals.

Meanwhile, a series of executive orders issued in early 2025 marked a sharp policy reversal from those of prior administrations. Executive Order 14173, titled Ending Illegal Discrimination and Restoring Merit-Based Opportunity, rescinded prior DEI-promoting mandates and directed federal agencies to enforce existing civil rights laws “to combat illegal private-sector DEI preferences, mandates, policies, programs, and activities.” The order also requires that every federal contract or grant include an express certification stating that the recipient “does not operate any programs promoting DEI that violate any applicable [f]ederal anti-discrimination laws” and that compliance with federal anti-discrimination laws is “material to the government’s payment decisions,” effectively linking alleged DEI-related violations to potential FCA liability.

NAVIGATING CONFLICTING FEDERAL AND STATE REQUIREMENTS

For companies holding government contracts, the new policy framework may have immediate operational consequences. Many businesses that traditionally viewed themselves as commercial entities, particularly in industries such as life sciences, banking, and technology, are discovering they have government-facing contracts that carry DEI-related compliance obligations. In response, organizations are reevaluating both the substantive structure of their DEI and supplier diversity programs and the procedural mechanisms for ensuring contract compliance.

Some companies are redefining eligibility criteria in their supplier programs to align with the Small Business Administration’s statutory definition of “small and disadvantaged businesses.” This approach allows them to maintain inclusion efforts through legally recognized categories while avoiding potential conflicts with federal restrictions. Some companies are also strengthening internal review processes for assessing certifications before new contracts or modifications are executed.

At the same time, state and local contracting regimes continue to impose affirmative action and non-discrimination obligations that may sit uneasily alongside the new federal requirements. Although it is often possible to find a way to navigate these regimes, doing so takes careful planning and close collaboration between the business and counsel.

EXPANDING USE OF THE FCA

Parallel to these contracting challenges, the DOJ and state AGs are turning increasingly to the FCA as a civil rights enforcement tool. In May 2025, the DOJ established the Civil Rights Fraud Initiative, which will use the FCA to investigate and pursue claims against recipients of federal funds that “knowingly violate federal civil rights laws.” The initiative calls for coordination among the DOJ’s Civil, Civil Rights, and Criminal Divisions; partnerships with state AGs; and greater encouragement of whistleblower suits.

Recently, the DOJ has issued civil investigative demands to companies across industries seeking extensive documentation about DEI policies and related employment practices, including historical records dating back several years. These requests often encompass materials related to leadership development, mentoring, or training programs limited by race or gender; hiring or compensation decisions tied to demographic representation; and communications regarding affirmative action programs or pay equity initiatives.

State AGs are also invoking their own FCA statutes to pursue similar investigations. Indiana, for example, now requires contractors to certify that they do not engage in DEI practices that treat individuals differently based on race or sex, explicitly warning that noncompliance could trigger state-level FCA liability. Comparable actions may follow in other jurisdictions.

FCA THEORIES AND DEFENSES

Under both federal and state law, the FCA imposes liability for knowingly submitting false or fraudulent claims for government funds. In the DEI context, enforcement efforts often hinge on a “legal falsity” theory, alleging that a contractor falsely certified compliance with anti-discrimination laws that are material to payment.

To establish FCA liability, the government must prove falsity, materiality, and scienter. Materiality is not automatically satisfied simply because a contract labels compliance as “material.” Courts will assess whether the alleged violation actually influenced the government’s decision to pay.

The government’s knowledge of the company’s DEI programs can also demonstrate a lack of materiality. If the government was aware of a contractor’s DEI programs and continued payment regardless, materiality is difficult to prove.

As for scienter, given the rapidly evolving nature of DEI law and conflicting EOs between recent administrations, companies that can demonstrate a good-faith belief in the legality of their conduct can defeat allegations that they “knowingly” violated the FCA.

RISK MITIGATION AND NEXT STEPS

These conflicting pressures underscore the importance of proactive steps to mitigate risk and prepare for potential investigations. Companies should consider:

• Conducting privileged audits of DEI-related policies and programs to ensure compliance with civil rights laws, followed by non-privileged summaries that document good-faith efforts
• Reviewing and tracking contract certifications to confirm that all DEI-related attestations are consistent with both federal and state requirements
• Enhancing compliance systems to detect and address civil rights concerns internally, including through whistleblower mechanisms
• Consulting counsel before executing certifications tied to DEI compliance or anti-discrimination obligations
• Developing response plans for potential inquiries or investigations under either federal or state FCA regimes

CONCLUSION

The evolving DEI landscape presents new and complex compliance challenges for government contractors and grant recipients. As state AGs and federal authorities continue to assert overlapping jurisdictional claims, companies must balance legal obligations that can pull in opposite directions. Clear documentation, rigorous internal controls, and proactive auditing will be essential to mitigating exposure as DEI-related enforcement under the FCA continues to expand.