Executive Order 14398 represents a significant expansion of the government’s enforcement posture on DEI and creates an environment where the cost of delay could substantially exceed the cost of preparation, Andrew Turnbull of Morrison Foerster writes. Contractors should consider implementing certain steps to mitigate risks related to these new requirements.
Federal contractors and subcontractors face sweeping new obligations under Executive Order 14398 that prohibit them from engaging in “racially discriminatory DEI activities” and requires reporting any “reasonably knowable” violations by subcontractors. The FAR Council has already issued a mandatory contract clause, FAR 52.222-90. Agencies have begun inserting it into new solicitations, targeting a completion date of July 24 for modifying existing contracts. Enforcement is not waiting. With a $17 million DOJ DEI settlement already on the books and the July 24 deadline approaching for existing contract modifications, the compliance window is fast approaching.
Expansive DEI restrictions and requirements
Executive Order 14398 goes beyond the Trump Administration’s earlier action under Executive Order 14173, which required contractors to certify they did not operate DEI programs that violated existing federal anti-discrimination law. The most recent executive order and the new FAR clause bind contractors to the following obligations:
- To not engage in any “racially discriminatory DEI activities.”
- Furnish all information and reports to the contracting agency to ascertain compliance with EO 14398, including providing access to books, records and accounts.
- Report to the contracting agency any “subcontractor’s known or reasonably knowable conduct that may violate” FAR 52.222-90 and “take any appropriate remedial actions” directed by the contracting agency.
- Inform the contracting agency if a subcontractor sues the contractor for putting EO 14398 at issue in any manner.
- Acknowledge that the contract may be canceled, terminated or suspended and the contractor or subcontractor declared ineligible for further government contracts for noncompliance.
- Recognize that compliance with FAR 52.222-90 is material to the government’s payment decisions for False Claims Act (FCA) purposes.
The phrase “racially discriminatory DEI activities” is defined broadly as disparate treatment based on race or ethnicity, including programs relating to recruitment, employment, training, mentorship, clubs, contracting, program participation or the allocation and deployment of resources. Several notable points stand out:
- The definition is limited to race and ethnicity; it does not reach gender or other protected characteristics.
- The prohibition is not tethered to violations of existing law, meaning it could capture programs that may be defensible under federal anti-discrimination law.
- It applies to a broad range of activities, including employment, supplier diversity, corporate investments, mentoring and resource allocation.
The “known or reasonably knowable” reporting standard creates significant ambiguity around what level of diligence the government will expect. Contractors should consider whether contractual, monitoring and other measures with subcontractors are warranted to mitigate compliance risk. Beyond legal exposure, this obligation is likely to create practical business and operational friction, especially if key subcontractors refuse to accept the clause or resist the contractor’s efforts to comply with EO 14398.
FAR 52.222-90 is being incorporated quickly and broadly. According to guidance from the FAR Council, FAR 52.222-90 must be included in all new federal contracts and “contract like” instruments over the micro-purchase threshold (currently $15,000). This includes contracts for commercial products and commercial services where the place of delivery or performance is in the US. Contracting officers must also “make every effort” to bilaterally modify existing contracts by July 24 but have discretion to modify contracts that will expire before Dec. 31.
Several agencies have already begun inserting FAR 52.222-90 into new solicitations and seeking bilateral modifications of existing contracts. Some prime contractors are also starting to flow down FAR 52.222-90 into subcontracts.
The FAR Council is also seeking Office of Management and Budget (OMB) clearance under the Paperwork Reduction Act (PRA) to impose several information-collection obligations under FAR 52.222-90, including producing books and records for the contracting officer, reporting subcontractor conduct that is “known or reasonably knowable” and may violate the clause and notifying the contracting officer of any subcontractor litigation challenging the clause’s validity. The FAR Council’s PRA supporting materials suggest the scale of these requests will be significant. It estimates 6,000-plus contractors may annually be subject to agencies’ records requests with each submission expected to require roughly one hour of contractor effort but 16 hours of agency review. How these reviews will be scoped, how far back they will reach, what specific data elements will be required under the final collection and whether the personnel conducting reviews will have training in assessing disparate treatment remain unanswered.
Contractors should begin organizing compliance records and building response protocols now rather than waiting for these questions to be answered. Even before PRA clearance, agencies retain authority to compel production of existing records in connection with investigations, including records sought by the EEOC or DOJ.
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FAR 52.222-90 requires contractors to acknowledge that compliance is “material to the government’s payment decisions” for FCA purposes. That express materiality provision is designed to neutralize a defense that contractors have historically raised that a requirement was too minor or ancillary to support an FCA claim. Whether that contractual language alone will satisfy the Supreme Court’s materiality standard under Universal Health Services, Inc. v. Escobar remains an open question, but it plainly signals the government’s intent to treat these certifications as enforceable commitments.
The consequences of noncompliance can be severe. FCA violations can result in treble damages, potentially up to three times the contract’s value plus per-claim penalties of roughly $14,000 to $28,000. Collateral consequences include suspension, debarment, reputational harm and shareholder class actions.
Noncompliance is now a ground for debarment and suspension under FAR Part 9. Under that traditional standard, debarment for contract breaches generally requires a “willful failure” or a “history of failure,” meaning the government must show serious, deliberate noncompliance. The revised FAR drops that threshold entirely for the new clause, which could lower the bar and make good-faith missteps a potential basis for exclusion from federal contracting.
The risk is reinforced by the multi-agency anti-DEI enforcement efforts contractors are facing from the Trump Administration.
The DOJ launched a civil rights fraud initiative in May 2025 and has since issued civil investigative demands to multiple contractors. In April 2026, the DOJ secured a $17 million settlement with a contractor over DEI-related FCA violations. This was the first resolution premised on “illegal DEI.” The conduct at issue, which dated to 2019, included tying compensation to demographic targets, using race in employment decisions and restricting access to leadership programs based on demographics. The lookback should concern every contractor: The government is not limiting its scrutiny to current practices.
Meanwhile, the EEOC under Chair Andrea Lucas has filed suit against Coca-Cola Beverages Northeast and is pursuing subpoena enforcement in ongoing investigations of employer DEI programs.
Steps to take now
Contractors should seriously think about implementing these steps.
- Audit DEI programs. Conduct a privileged review of DEI programs, policies and practices in which race or ethnicity play any role. This includes reviewing recruiting, hiring, mentoring, employee resource groups, supplier diversity, corporate investments and resource allocation. Extend the review to practices not labeled “DEI,” such as performance metrics tied to demographic targets. Many contractors have already audited their DEI programs in light of the growing scrutiny, but those audits should be revisited to ensure they include the broad scope of programs, activities and resources covered by the definition of “racially discriminatory DEI activities.” It is critical to ensure that individuals signing compliance certifications for FAR 52.222-90 have verified the contractor’s compliance. A well-documented audit mitigates risk by supporting the position that certifications were made in good faith.
- Prepare for contract modifications. Set up a cross-functional team to manage incoming modification requests. Verify that each modification matches the deviation language exactly. Watch for agencies attempting informal certifications outside the formal modification process, as some did under EO 14173.
- Execute subcontractor flow-downs. Inventory affected subcontracts, determine which lower-tier entities qualify as subcontractors (not all vendors will) and issue flow-down modifications. Update templates with audit rights and indemnification language where possible.
- Build subcontractor monitoring. The “known or reasonably knowable” reporting standard is undefined, so consider building a documentation trail that demonstrates due diligence in case the government comes knocking. Consider requiring robust subcontractor certifications, questionnaires on DEI practices and enhanced complaint-reporting mechanisms, as well as training personnel who interact with subcontractors.
- Get records ready. Even before PRA clearance, agencies can demand existing records in connection with investigations. Contractors should consider identifying and centralizing the records needed to demonstrate compliance and implementing a litigation-tracking protocol for any subcontractor challenges to FAR 52.222-90.
- Assess federal and state conflicts. Contractors that hold both federal and state contracts with competing diversity requirements should consider mapping those obligations and evaluating them closely with experienced counsel to determine whether their procurement and subcontracting processes are structured to reduce overlap risk.
- Monitor challenges to EO 14398, but do not wait for compliance. Suits have already been filed against EO 14398. This includes claims by a coalition of educational and minority contractor associations in Maryland challenging EO 14398 on multiple grounds. This litigation is worth monitoring, particularly given the mixed results courts have reached on challenges to EO 14173. But contractors should not defer compliance based on the possibility of injunctive relief. Unless a court issues an order, the FAR Council’s implementation timeline for FAR 52.222-90 remains in effect.
Andrew Turnbull is a partner in the firm’s global employment and labor group and co-leader of the firm’s anti-bias strategy and defense task force. He has extensive experience advising, defending, and investigating high stakes and class discrimination, harassment, and whistleblower claims, including enforcement actions by EEOC, DOL, DOJ Civil Rights, ICE and similar state agencies. 
