Maryland Court Declines to Block Contractor DEI Executive Order, Adopts Narrow Reading

The US District Court for the District of Maryland on Wednesday, October 14, 2026 declined to find Executive Order 14398 (the EO)—which addresses diversity, equity, and inclusion (DEI) activities among federal contractors—and the procurement guidance implementing it unconstitutional on its face while litigation over its implementation continues.

The court chose to read the EO narrowly, holding that, as written, its prohibition on “racially discriminatory DEI activities” only prohibits “intentional discrimination” consistent with existing federal antidiscrimination law and does not bar contractors from maintaining inclusion programs that otherwise comply with those laws. The court warned that contractors could challenge enforcement that goes beyond its narrow reading of the EO.

CONTRACT OBLIGATIONS REMAIN IN PLACE

As we noted in our earlier LawFlash, New Executive Order Targets Federal Contractor DEI Discrimination, Ramps Up FCA Enforcement Directives, Executive Order 14398 requires new contract terms, access to compliance records, reports about subcontractors, and an acknowledgment that compliance matters to the government’s payment decisions. It also directs the government to consider False Claims Act (FCA) enforcement and provides for contract termination and exclusion from federal work through suspension or debarment.

The decision does not remove those obligations. It does, however, provide important guidance on what the EO lawfully prohibits—that is, it prohibits “disparate treatment” which amounts to “intentional discrimination” that already has been deemed unlawful; it does not prohibit lawful DEI or other inclusion efforts.

THE COURT LIMITS THE ORDER TO UNLAWFUL DISCRIMINATION

The court described the EO as a “narrower executive order” than Executive Order 14173. The EO prohibits “disparate treatment based on race or ethnicity” in recruitment, employment, contracting, program participation, and the use of resources. The court explained that “disparate treatment” means unlawful intentional discrimination, not simply acknowledging or discussing racial differences or publishing materials related to DEI.

As our earlier coverage noted, the new EO does not expressly refer to federal anti-discrimination law. The court nevertheless concluded that its use of “disparate treatment” ties the prohibition to existing law. The court acknowledged that a broad, undefined ban on “racially discriminatory DEI activities” could raise serious First Amendment concerns but determined that language in the EO specifically limiting it to “disparate treatment” confined its reach. This reading addresses concerns raised in our earlier LawFlashes that the EO could impose obligations beyond existing law.

The court distinguished “disparate treatment,” a legal term of art that bars intentional discrimination, from lawful activities connected to race or ethnicity, such as research into diseases that disproportionately affect particular racial groups, teaching or publishing about race and inclusion, and discussion of historic racial disparities. Those activities do not, by themselves, mean someone is being treated less favorably because of race or ethnicity and are therefore permissible. The court warned that an FCA case based on lawful programs could exceed the EO’s limits and violate First Amendment protections, and as noted below, could be a basis for claims of unconstitutional retaliation.

The court also highlighted statements from the US Department of Justice in the case acknowledging that lawful inclusion activities would not be prohibited. Further, it noted the government’s concession in earlier litigation that DEI activity can “fall[] comfortably within the confines of the law.” Although the court based its reading on the EO’s text and context, not those statements, it said contractors could point to the statements when challenging contract cancellations or FCA cases that target lawful DEI activities.

The required clause begins, “In connection with the performance of work under this contract.” The plaintiffs in this case argued that the phrase was unduly vague and could be read to apply to a range of activities not related to a specific contract. The court disagreed, reading this language as limiting the clause to work performed for the government under the contract containing it. The court warned, however, that if the government were to use the order to penalize protected speech or conduct outside the contract, contractors could have valid “unconstitutional retaliation” claims. The court further noted that government counsel “directly acknowledged” the validity of such claims in its filings.

The court denied the plaintiffs’ request for temporary relief; it did not dismiss the case or approve every possible use of the EO. The plaintiffs also had not shown that the FAR Council memorandum, as distinct from the contract clause the EO independently requires, would cause harm that could not be remedied later. The court left other Administrative Procedure Act questions open, including whether the memorandum is a final agency action that can be challenged and whether the council adequately explained and supported its decision.

LABOR AND EMPLOYMENT CONSIDERATIONS

For employers, the focus should be on the intent and implementation of their programs, not whether they use the term DEI. The practical steps below follow from the court’s reasoning.

Review who can participate in employee resource groups (ERGs) and receive benefits. The decision supports continuing ERGs that comply with existing antidiscrimination law. Check membership rules, event access, leadership eligibility, mentoring opportunities, and workplace benefits for unlawful race- or ethnicity-based restrictions or preferences. An ERG’s focus on a particular community or discussion of racial experiences does not, by itself, establish discrimination. A statement that membership is open to all helps only if the group operates that way in practice.

Apply lawful, consistent criteria for employment opportunities. Review hiring, promotion, training, mentoring, and leadership-development decisions to ensure that they do not take race or ethnicity into account. Expanding outreach while applying lawful, consistent selection criteria is different from using race or ethnicity to decide who receives an opportunity. Check eligibility rules, nomination processes, manager instructions, and actual decisions, not just the program’s stated purpose.

Separate education from decisions about benefits. The opinion supports the view that discussing race, historical disparities, or inclusion is not inherently prohibited. Review training content, who may attend, and how the training is delivered. Similarly, using data to identify disparities for compliance purposes is different from using race to distribute employment benefits. The court did not approve every training format or use of demographic data.

Revisit paused programs with counsel. Employers that paused programs based on a broad reading of the order should consider reassessing those decisions with counsel, including how to protect privileged communications. Keep records of program purposes, eligibility rules, participation, and how decisions are made, and make sure communications match actual practices. Renaming a program does not fix discrimination, and a lawful program does not necessarily need a new name. Continue to investigate employee concerns promptly and reinforce the prohibition on retaliation.

GOVERNMENT CONTRACTS & FCA CONSIDERATIONS

Our LawFlash, FAR Council Moves to Prohibit ‘Racially Discriminatory DEI Practices’ Through Mandatory Contract Clauses, explained the FAR Council’s implementation guidance. The guidance provides model clause FAR 52.222-90 and calls for agreed changes to existing contracts (bilateral modifications) and inclusion of the clause in covered subcontracts (flow-downs). The October 14 decision leaves those requirements in place and it clarifies what conduct the prohibition on “racially discriminatory DEI activities” covers.

Track the requirements in each contract. Identify which contracts include the clause, track modifications and related commitments, and coordinate across legal, human resources, compliance, procurement, and contract-management teams. The FAR Council guidance directs agencies to consider termination for convenience if the parties cannot agree to add the clause.

Document the intent behind programs. It should be routine practice to assure and document that any programs involving race, ethnicity, or sex have been developed in good faith to comply with all federal antidiscrimination laws.

Check subcontract and reporting obligations. Decide which lower-tier agreements require the clause based on whether they qualify as a covered subcontractor. Assess potential reporting duties in light of the court’s narrow reading of the order. A DEI program’s existence alone is not proof of a violation. But the clause covers a subcontractor’s known or reasonably knowable conduct that may violate its terms, so assess reporting duties promptly rather than waiting for a court to find a violation.

Plan for more than one type of enforcement. The narrower reading does not eliminate investigations, contract remedies, challenges to eligibility for federal work, or FCA cases. The opinion did not decide any contractor’s FCA liability. Nor does the required acknowledgment about payment decisions, by itself, establish FCA liability. Contractors may challenge enforcement that goes beyond the order, but that does not prevent an investigation or adverse action. Assess employment, procurement, and FCA risks together.

THE BOTTOM LINE

While the decision does not enjoin the EO altogether, it is a significant development for federal contractors. By interpreting Executive Order 14398 as prohibiting unlawful intentional discrimination—not DEI programs generally—the court provides support for employers to continue lawfully structured ERGs, mentoring, training, and other inclusion initiatives without abandoning them simply because they focus on diversity or address racial disparities. Just as importantly, the court made clear that the government cannot use the order to prohibit otherwise lawful activities or protected speech, and that contractors may challenge enforcement efforts that cross those lines.

Although the decision leaves the order’s contractual and enforcement requirements in place, it gives contractors a stronger basis to distinguish lawful inclusion efforts from prohibited discrimination. Employers should therefore focus on ensuring that their programs operate lawfully, documenting that compliance, and coordinating employment and government contracts reviews—rather than reflexively eliminating programs or treating all DEI-related activities as prohibited.

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