U.S. Appeals Court Lifts Injunction Against DEI Executive Orders, Enhancing False Claims Act Risk

On Friday, March 14, the U.S. Court of Appeals for the Fourth Circuit granted the government’s motion to stay a nationwide injunction issued last month that broadly prohibited the federal government from enforcing portions of two executive orders (EOs) targeting diversity, equity, and inclusion (DEI) programs at companies that do business with the federal government. The injunction had left open questions as to the federal government’s leeway to pursue enforcement actions, including under the False Claims Act (FCA), premised on allegedly unlawful DEI programs. The Fourth Circuit’s decision reinvigorates the federal government’s prerogative to pursue DEI-based enforcement actions against recipients of federal funds, although two members of the panel cautioned that how the EOs are applied in practice could implicate First and Fifth Amendment concerns.

As we previously explained here, the EOs directed federal agencies to terminate “equity-related grants or contracts” and expressly created potential False Claims Act (FCA) liability for federal contractors with unlawful DEI programs. A federal district court in Maryland enjoined enforcement of the EOs last month. In response to a motion for clarification from the plaintiffs, the district court subsequently confirmed that the injunction applies to all federal executive branch agencies and officers, including agencies and officers that the plaintiffs had not named as defendants. The government immediately appealed and requested a stay of the injunction pending appeal.

On Friday, a three-judge panel of the Fourth Circuit voted unanimously to take the rare step of staying the district court’s injunction pending appeal. All three judges wrote brief, separate concurrences to explain their reasoning. Chief Judge Albert Diaz emphasized that although the government had met the standard for a stay pending appeal, in his view, “people of good faith who work to promote [DEI] deserve praise, not opprobrium.” Judge Pamela Harris explained that the challenged EOs seemed facially lawful, but she reserved judgment on whether “how [the EOs] are enforced” would violate the Constitution. Judge Allison Rushing raised concerns about the scope of the district court’s injunction and the ripeness of the case while underscoring that a “judge’s view on whether certain Executive action is good policy or not is not only irrelevant” but also “an impermissible consideration.” The panel noted that it would set an expedited briefing schedule to hear the full merits of the government’s appeal.

In light of the Fourth Circuit’s decision, the Trump administration may enforce the DEI EOs while the litigation plays out, including by adding provisions to federal contracts—and enforcing existing provisions—that make compliance with federal antidiscrimination laws a material term for FCA purposes. Until this litigation is fully resolved, companies doing business with the federal government should understand the potential for ongoing enforcement risk, particularly under the FCA and its whistleblower provision, arising from DEI programs and activities.