Quick Hits
- Twenty states and the District of Columbia, acting in their capacity as federal contractors, have filed suit challenging the FAR Council’s implementing actions for EO 14398, arguing those actions exceed the agency’s statutory authority and were issued without the notice-and-comment process required under federal procurement policy requirements.
- The state coalition targets the agency implementing actions under the APA, arguing they are procedurally defective and the resulting contract terms too vague to enforce.
- Another lawsuit challenges the executive order on First Amendment grounds and alleges the FCA materiality provision exceeds presidential authority under the Procurement Act.
The lawsuit, Maryland v. Hegseth, does not challenge the executive order itself. Rather, it takes direct aim at the federal agency actions implementing the order, arguing those actions violate the Administrative Procedure Act (APA) by exceeding statutory authority, bypassing mandatory notice-and-comment procedures, and producing contract terms so vague as to be arbitrary and capricious. For federal contractors and subcontractors currently navigating compliance with EO 14398, the lawsuit raises the possibility of court intervention before the July 24, 2026, deadline for bilateral modification of existing contracts.
Background: EO 14398 and Its Implementation
EO 14398, titled “Addressing DEI Discrimination by Federal Contractors,” requires federal agencies to insert a mandatory contract clause into all contracts, subcontracts, and “contract-like instruments” prohibiting contractors from engaging in “racially discriminatory DEI activities,” defined as disparate treatment based on race or ethnicity in recruitment, employment, contracting, program participation, or the allocation or deployment of an entity’s resources. Noncompliance risks include contract cancellation, debarment from future federal contracts, and potential liability under the False Claims Act.
Pursuant to EO 14398, the Federal Acquisition Regulatory Council (FAR Council) issued a memorandum dated April 17, 2026, directing agencies to adopt Federal Acquisition Regulation (FAR) deviations incorporating the new contract clause, designated as FAR 52.222-90. The memorandum set an April 27, 2026, deadline for agencies to adopt those deviations and instructed agencies to make every effort to bilaterally modify existing contracts by July 24, 2026. Multiple agencies, including the National Aeronautics and Space Administration (NASA), the Consumer Product Safety Commission, and the National Science Foundation, moved to adopt class deviations consistent with the FAR Council’s instructions.
The plaintiff states span twenty jurisdictions, from California and Illinois to Virginia and Wisconsin, and collectively hold hundreds of federal contracts worth billions of dollars annually. The complaint alleges that the “abrupt and unlawful rollout of Executive Order No. 14398 and its implementation threatens grave and irreparable harm to the States’ economic interests and their ability to serve the public.”
Legal Grounds Challenging the Agency Actions
The complaint brings two counts, both under the APA. The lawsuit targets agency-level implementing actions rather than the executive order itself and does not raise claims under the First Amendment of the U.S. Constitution or other constitutional claims.
Count I: Procedural Violations and Excess of Statutory Authority
The states allege the FAR Council and other federal agencies exceeded their statutory authority and violated mandatory procedural requirements. Specifically, the complaint alleges:
- The new contract terms and policies have a significant effect on contractors and impose significant compliance costs, and thus were required to be published for public comment in the Federal Register at least sixty days before taking effect under 41 U.S.C. § 1707, the statute governing federal procurement policy. Neither the FAR Council nor any agency complied with that requirement, and no valid waiver was invoked.
- The FAR Council’s April 2026 memorandum exceeded the authority granted to it under 41 U.S.C. § 1303, which authorizes the FAR Council to manage and coordinate the FAR, not to prescribe agency deviations, direct agency procurement activities, or set mandatory deadlines for bilateral modification of existing contracts.
- The agency class deviations are unauthorized under the FAR’s own provisions, which permit deviations only “‘when necessary to meet the specific needs’” of an individual agency and do not permit deviations to implement a new governmentwide policy.
- The False Claims Act (FCA) materiality clause in FAR 52.222-90 is contrary to law. The provision purports to make compliance with the clause “material” under the FCA, but under controlling Supreme Court of the United States precedent, “[m]erely labeling a clause ‘material’ does not make it so.” This matters for contractors and subcontractors because the clause, as drafted, purports to expose them to FCA liability for noncompliance with contract terms that the states argue have not been lawfully adopted.
- The agencies also violated the Paperwork Reduction Act by imposing reporting and recordkeeping requirements without first completing the required notice-and-comment process and obtaining Office of Management and Budget approval.
Count II: Arbitrary and Capricious Agency Action (APA)
The states separately allege the implementing actions are arbitrary and capricious because the agencies failed to adequately explain what the new contract terms mean or require and failed to explain how they differ from antidiscrimination requirements previously and currently applicable to federal contractors. The complaint identifies several ways this vagueness causes concrete harm:
- Contractors are left to guess whether common antidiscrimination and outreach activities might constitute prohibited “disparate treatment” in recruitment or resource allocation. The complaint offers concrete examples: forwarding a job listing to an associate at a historically Black college, attending a job fair in a predominantly white rural community, or responding to workplace incidents of antisemitism by training employees and distributing educational materials. It is unclear under the current contract terms whether any of these activities would be prohibited.
- The definition of “racially discriminatory DEI activities” echoes existing prohibitions on discrimination based on race or ethnicity but provides no meaningful guidance on whether, or how, it imposes requirements beyond those already applicable under Executive Order No. 11246 (rescinded) or its successor, Executive Order No. 14173.
- The vagueness is compounded by the ancillary requirements attached to FAR 52.222-90: broad records-access requirements, obligations to report possible subcontractor violations, and the threat of FCA liability. The complaint argues “[i]t is unreasonable to demand that contractors identify possible violations of a requirement that itself has not been defined clearly.” (Emphasis in original.)
- The agencies failed to account for the reliance interests of federal contractors and subcontractors that have designed their employment, subcontracting, and compliance policies and practices based on federal statutes and controlling decisional law in effect for decades.
Relationship to the April 2026 Constitutional Challenge
Federal contractors and subcontractors now face a litigation environment in which EO 14398 is being challenged on two independent fronts. Either case could produce injunctive relief affecting contract compliance obligations.
The April 2026 constitutional challenge filed by the National Association of Diversity Officers in Higher Education (NADOHE) and a coalition of higher education and minority trade associations focused on First Amendment violations, alleging the order chills protected speech and association, imposes unconstitutionally overbroad and content-based restrictions on contractors, and that the EO’s FCA materiality provision exceeds presidential authority under the Procurement Act.
The state coalition’s APA lawsuit operates independently and on different legal footing. By targeting agency-level implementing actions rather than the executive order itself and relying exclusively on APA grounds, the states position themselves to seek vacatur of the FAR Council’s April 2026 memorandum and the agencies’ class deviations without the court needing to reach constitutional questions. The complaint also introduces a procedural angle not present in the NADOHE case: the argument that the FAR Council and agencies were required to conduct public notice and comment before implementing these contract terms and failed to do so.
Next Steps
Maryland v. Hegseth is the latest challenge to the Trump administration’s executive orders seeking to eliminate DEI programs among federal contractors, and sets the stage for additional potential court orders affecting implementation of EO 14398. While the requested injunction is limited to the plaintiff states, a court order vacating the FAR Council memorandum and agency class deviations would have governmentwide effect. All federal contractors and subcontractors, not only those in plaintiff jurisdictions, have reason to monitor this litigation closely. Given the evolving litigation landscape, federal contractors and subcontractors may wish to assess their current posture and consider the following steps:
Bilateral modification requests. Contractors and subcontractors that have received or anticipate receiving requests from contracting officers to execute bilateral modifications incorporating FAR 52.222-90 may wish to consider the legal ramifications in advance of the July 24, 2026, deadline, particularly given the pendency of this litigation. The potential contract consequences of declining to agree to a modification are among the considerations that may warrant early legal guidance.
Consider a qualitative and quantitative privileged review of workforce programs. Contractors and subcontractors may wish to conduct a privileged review of existing antidiscrimination, outreach, recruiting, and workforce compliance programs, including privileged workforce analytics for legal risk mitigation. The complaint itself identifies uncertainty about whether common activities such as targeted recruiting outreach and workplace antisemitism training fall within the scope of FAR 52.222-90. Recent enforcement actions have demonstrated that the government conducts its own workforce analytics using employers’ raw data; organizations that have conducted their own privileged analysis in advance are better positioned to provide context and explanations if questions arise.
Understand the FCA compliance certification risk. FAR 52.222-90 includes a materiality clause representing that compliance is material to the government’s payment decisions under 31 U.S.C. § 3729(b)(4). Under the FCA, “knowingly” includes acting in “deliberate ignorance” or “reckless disregard” of the truth. 31 U.S.C. § 3729(b)(1). Contractors and subcontractors may wish to assess how their existing compliance programs relate to the certifications being made on each invoice submitted under a covered contract.
Consider preserving documentation of existing compliance practices. Contractors and subcontractors may also wish to consider how their existing employment and compliance programs are documented in relation to federal antidiscrimination statutes and controlling case law. The states’ reliance-interest argument in this lawsuit suggests that the history of how compliance programs were designed and grounded in existing law may be relevant both to any litigation outcome and to agency compliance reviews.
Records-access considerations. FAR 52.222-90 requires contractors to provide broad access to books, records, and accounts for compliance review. Given the clause’s vague scope, contractors and subcontractors may wish to consult with counsel regarding what records could be subject to demand and how workforce analytics and compliance documentation is currently structured.
Monitor both active challenges. Track developments in both Maryland v. Hegseth and the NADOHE constitutional challenge rulings on both the preliminary injunction, which is limited to the plaintiff states, and any vacatur of the FAR Council memorandum and agency class deviations, which would have governmentwide effect on the July 24, 2026, compliance deadline.
