On The Federal Drive with Terry Gerton podcast, she interviews Dan Ramish, a Partner with Haynes Boone. The administration’s latest DEI directive is moving ahead on two tracks, into federal contracts and into federal court. While a lawsuit raises questions about its scope and authority, agencies are pressing forward with new clauses and compliance expectations.
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TRANSCRIPT:
Terry Gerton The topic of diversity, equity, and inclusion continues to be in the federal contractor conversation. Tell us what exactly is happening right now with federal contractors and DEI.
Dan Ramish So federal agencies are taking steps to implement sweeping new prohibitions on contractor participation in diversity, equity, and inclusion programs that the administration characterizes as involving race or ethnicity-based disparate treatment. And these were introduced in executive order 14398, Addressing DEI Discrimination by Federal Contractors, which was issued March 26th of this year. So, government contractors that have not already done so, including subcontractors, commercial products and services providers, really need to be establishing plans for how they’re going to respond to these new policies. When the policies were first issued, when the order was issued, it wasn’t clear how quickly they would be carried out, even though it had a rapid implementation schedule. The FAR Council did follow up and issue guidance and model deviations to kind of make it real. As we know, in government contracts, the policy kind of becomes actionable through contract clauses. And so the reason this is worth talking about now is because the process is working its way. After the guidance was issued and the implementing clause was published, 52.222-90, Addressing Discrimination by Federal Contractors, it started appearing in new solicitations and contracting officers are also starting to negotiate to include it in existing contracts, and per the guidance in the executive order, it’s supposed to be added to all contracts by July 24th, 2026. And so there’s also, at the same time, a lawsuit that is challenging the order that’s in the early stages of litigation.
Terry Gerton We’ll come back to the lawsuit in a minute, but this is the latest but not the first move that the administration has made on DEI. Maybe catch us up on sort of the cumulative impact of all of these different orders and pieces of guidance.
Dan Ramish Sure. So this new order builds on some of the administration’s early actions, notably day two of the new administration, the president issued executive order 14173, Ending Illegal Discrimination and Restoring Merit-based Opportunity. And that order was tethered to existing civil rights law. It required clauses and contracts and grants requiring the contractor recipient to certify that they do not operate programs promoting DEI that violate any applicable federal anti-discrimination laws. But the order also explicitly stated it didn’t prevent contractors from engaging in First Amendment-protected speech. So it was really framed to reinforce existing anti-discrimination law rather than creating new law.
Terry Gerton So how is this new order different from that one?
Dan Ramish So the new order goes much further. The executive order requires government contractors to agree not to engage in any racially discriminatory DEI activities. And those terms are broadly defined. Racially discriminatory DEI activities are defined as disparate treatment based on race or ethnicity in the recruitment, employment, contracting, program participation, or allocation or deployment of an entity’s resources. And the programs covered include anything from training, mentoring, or leadership development programs, educational opportunities, clubs, associations, similar opportunities that are sponsored or established by a contractor or subcontractor. And participation is anything from membership to participation into access or admission to. So very broadly construed, and not tethered to existing civil rights or anti-discrimination law. So arguably broader and prohibiting some amount of legal activity in the DEI area. And certainly that’s the contention of the lawsuit that’s going on.
Terry Gerton What happens if a contractor runs afoul of this? I mean, these guidelines are so broad, they could unintentionally not be compliant. Are there penalties associated with this?
Dan Ramish Yes. So, I guess for starters, the contractor has to provide the government access to books and records so that this will be a knowable thing for the government. Of course, there are some constraints on resources, but contractors will need to provide some information about this, at least upon request of the contracting officer. If there are found to be violations, if the government chooses to enforce these obligations against a particular contractor, the executive order and clause authorize a range of severe consequences, including cancelation, termination, or suspension of the contract, up to exclusion from government contracts, suspension or debarment, and there are also references to False Claims Act enforcement. So they can really throw the book at you if they allege violations of these obligations.
Terry Gerton Dan Ramish is a partner at Haynes Boone. Dan, does the prime contractor’s exposure stop with its own content or does it extend to its subs?
Dan Ramish So this is a critical point and rather an unusual point, I would say. Government contractors don’t just have an obligation to flow down these obligations to subcontractors, which would be fairly typical, but contractors are required to report subcontracter conduct that violates the clause that is known or reasonably knowable and to take appropriate remedial actions directed by the contracting department or agency. And going beyond that, prime contractors may be subject to the same range of consequences for subcontractor violations as for their own violations. So there’s really a heightened expectation of oversight of subcontractor activity by prime contractors here.
Terry Gerton And you mentioned a July deadline earlier. What exactly are contracting officers trying to get done by that July deadline? And do contractors themselves have any options here?
Dan Ramish Well, so the July deadline is for contracting officers to, per the implementing guidance, make every effort to bilaterally mod existing contracts by July 24th to add the clause. And the memorandum from the FAR Council says, if a contractor refuses to agree to a bilateral modification, the contracting officer should consider whether, absent the modification, the contract no longer meets the agency’s needs and therefore should be terminated. So there’s a potential threat of convenience termination, at least implied by the guidance here. So there are limited options to contractors now. There are questions about whether termination in those circumstances would be appropriate. Certainly, I think there’s a reasonable position to take that resistance to the addition of a clause is not relevant to whether the requirement continues to exist the way that the guidance is framed, but these present practical challenges for contractors for sure.
Terry Gerton You did say this case is already being tested in court. Who’s bringing the lawsuit and what are the issues there?
Dan Ramish So the National Association of Diversity Officers in Higher Education, NADOHE, is bringing the lawsuit in the federal district court in Maryland. And there are three grounds that they’re contesting this on. First, they’re arguing that the executive order impermissibly restricts free speech and free association rights. The plaintiffs, which are educational associations and minority contractor associations, as well as contractors and subcontractors, and is overbroad in prohibiting protected speech that is lawful. And it argues that the definition of racially discriminatory activities is vague and sweeping, and it chills that lawful expression. The second First Amendment count argues that the order discriminates against protected expression and association based on content and imposing an unconstitutional condition on the receipt of government funds. And so that’s targeting the order’s purpose and mechanism, arguing the government is singling out this favored viewpoint pro DEI expression for penalty and using contract eligibility to coerce contractors into surrendering their speech rights. And then the third argument is focused specifically around the Civil False Claims Act enforcement provision, arguing that that provision exceeds the president’s authority under the Federal Property and Administrative Services Act. So the FPASA authorizes the president to prescribe policies necessary to carry out the statute’s purpose of providing the government an economical and efficient system for procurement. And the argument is that there isn’t a sufficient nexus between the economy and efficiency and procurement purpose and the FCA enforcement mechanism. There’s actually an argument that the entire order really goes beyond that authority and there’s some case law from recent years that’s taken a kind of narrow review of FPASA authority, including litigation over the COVID-19 vaccine mandate. However, there may be some challenges here as compared to the COVID scenario because there is a long-standing history of contract clauses addressing equal employment opportunity and affirmative action in government contracts. And so the administration would argue, well, this is just another equal opportunity provision, even though of course it is quite different than the previous equal opportunity provisions. But it’ll be interesting to see how that plays out.
Terry Gerton So while the case is making its way through the court system, what should contractors be doing now to make sure they’re compliant or watching to see whether they have to comply, depending on the resolution of the case?
Dan Ramish Well, so one important point to note about the case is that there currently is not a motion for a temporary restraining order or a preliminary injunction. So there isn’t necessarily going to be any kind of ruling on whether this will go forward in the near term or not. And also contractors are already being approached by contracting officers to add the clause to existing contracts. And so contractors can’t wait for the Maryland lawsuit to play out. They need to be proactive in developing a plan. So these requirements will apply to nearly all government contractors, including subcontractors and commercial products and services providers, any company that has a contract with a place of delivery or performance in the United States. And so first contractors need to evaluate their current activities if they haven’t already done so. The executive order reaches many common long-standing corporate activities that promote diversity, ranging from subcontractor programs to mentorship opportunities to affinity groups, and contractors need to know where they stand on the programs they’re involved with and consider using counsel to perform that assessment so that it’s covered by privilege. In some cases, there will also be added challenges because the prohibition might conflict with other legal obligations. For example, if contractors do work with state governments, state procurement subcontracting requirements might conflict with the federal prohibition. Second, contractors will need a plan for whether they will or can accept the new clause in solicitations in existing contracts when they see it. There are potential grounds to challenge the order and its implementation, of course it’s a Maryland action that illustrates this. There are arguments that it violates the First Amendment, exceeds the president’s authority under FPASA. There also technical arguments that the deviations didn’t go through notice and comment rulemaking when they were required to and are invalid for that reason, among other possible grounds. Contractors may, however, be reluctant to take on that fight, particularly because there may yet be relief in the action in Maryland. But there’ll need to be a short-term plan one way or the other. There are other practical implications. Even for those contractors, once they’ve decided that they need to comply and accept the clause, the subcontracting provisions will present particular challenges. Suppose, for example, that a subcontractor is essential to the contract and won’t accept the clause. When a contractor accepts the implementing clause, they’re going to need to adjust their own DEI program participation and develop a plan for subcontractor compliance that’s tailored to this known or reasonably knowable standard. And so that will start with things like flow down requirements and representations and certifications, but they will need to figure out what further level of oversight is necessary to meet that obligation of the clause. So these are really challenging issues for government contractors to navigate, setting aside the kind of spicy political issues of the underlying requirements of the clause and the order. Dealing with both their own compliance with the sweeping restrictions and compliance with subcontractors throughout the supply chain is a real challenge.
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