The DOJ’s heightened scrutiny of contractors for “illegal DEI”: Key takeaways from remarks by DAAG Brenna Jenny

Under the FCA, a federal contractor or grantee who knowingly presents, or causes to be presented, false claims or statements material to the government’s payment decision may be liable for three times the government’s damages, plus penalties and costs. The FCA’s qui tam provisions also expose recipients of federal funds to whistleblower suits, which the whistleblower may litigate even where the government chooses not to pursue enforcement. The DOJ has made clear, and Jenny’s remarks confirm that, consistent with the current Administration’s goals and pronouncements, the DOJ is using the FCA in a way that has never been used before – as a vehicle to punish federal contractors and recipients of federal funding for alleged past practices that it deems to be violative of the federal anti-discrimination laws.

Jenny’s remarks provide significant insight into how the DOJ is approaching FCA investigations in the DEI space. However, the DOJ’s use of the FCA to target past employment practices remains untested in the courts and would face significant legal hurdles if ever pursued. Regarding current practices, the remarks provide useful signals that should inform how companies audit and, where appropriate, adjust their practices now to limit potential FCA scrutiny.

Falsity: Illegal discrimination in contractor employment practices

Jenny’s principal theme was that claims submitted to federal agencies are false if the contractor or grantee sought federal funds while its employment practices violated applicable anti-discrimination laws. She began by stressing that the Civil Division is not investigating contractors merely for having DEI programs. Instead, the Division is investigating whether their programs violate federal anti-discrimination laws. Jenny identified two overarching concerns for the DOJ: first, preferential hiring, promotion and compensation; and second, the selection of candidates for special programs, such as internships and training, when decisions are made on the basis of race or sex. She also provided examples of additional conduct that could run afoul of anti-discrimination requirements.

Jenny said the Civil Division’s investigations are designed to uncover programs and practices that pressure supervisors and management to make hiring and promotion decisions based on protected characteristics – practices she equates with false certifications of compliance with federal anti-discrimination laws. She believes the DOJ would have a particularly strong case where that pressure had its intended effect and resulted in decisions being made based on race or sex. Jenny described three types of conduct that have attracted her attention in investigations:

1. Race- or sex-based demographic goals: Some companies have set internal race- or sex-based hiring or promotion targets, e.g., a goal of having a certain percentage of the workforce be women or minorities. Jenny believes that tracking performance against these goals can signal preferred demographic outcomes and be used to incentivize or pressure managers to make decisions based on protected traits, rather than focusing on qualifications and merit.
2. Compensation tied to demographic goals: In some investigations, the DOJ has seen senior executive or recruiting manager bonuses linked to achieving specific workforce demographic results. Jenny views such schemes as pressure on managers to “move the numbers,” effectively encouraging decision-makers to factor race or sex into hiring or promotion decisions in order to receive a bonus.
3. Linking DEI goals to employee performance reviews: Jenny has seen evidence of companies setting demographic goals for managers – such as committing to staff teams with a certain demographic makeup – and then evaluating employee performance against those goals during reviews that may impact promotion. The DOJ’s position is that evaluating employees this way can create pressure to take protected characteristics into account when making staffing or promotion decisions.

Jenny explained further that the DOJ is looking into executive training and mentoring programs where participation is restricted on the basis of protected characteristics, such as:

• Career advancement programs with restricted eligibility: Jenny expressed concern about mentoring, leadership, or sponsorship programs that offer access to senior leaders and/or promotion related opportunities but limit participation on the basis of race or sex. According to Jenny, even when companies hold these programs out as open to all employees, in practice, they are often offered or prioritized to certain protected groups. Per the DOJ, these programs can raise concerns about unequal access to advancement opportunities, particularly where companies track or analyze the relationship between participation in these programs and promotion outcomes.
• Diverse slate policies applied unevenly: Jenny said the DOJ has seen “diverse slate”² policies that operate in practice to lower qualification requirements for candidates of a particular protected status, while holding other candidates to higher standards. Jenny indicated that her investigators are looking closely at how diverse slate policies operate in practice.

Jenny’s remarks indicate that the DOJ will argue falsity where a contractor or grantee promises, represents, or certifies to equal treatment in employment practices under law or contract while engaging in actual practices that require, incentivize, or pressure employees to discriminate on the basis of race, sex, or other protected characteristics.

Materiality: The DOJ’s framing

Jenny focused her comments concerning materiality on the policy justifications for embedding anti-discrimination law in FCA enforcement as opposed to the payment decisions or processes of government agencies. Jenny asserted that compliance with anti-discrimination obligations is material because federal contracting is not simply about supplying a good or service – it is about selecting partners to perform public work with public funds consistent with federal law and policy. If a company accepts federal funding while engaging in discriminatory practices, Jenny said the DOJ views that company as “stepping outside the conditions under which the government agreed to provide financial support.”

Addressing concerns that have been raised by the defense bar, Jenny asserted that the absence of prior FCA enforcement actions specific to this type of discrimination does not undercut materiality. Jenny observed that FCA enforcement has always evolved to meet new schemes with new theories of liability, citing kickbacks in health care, off-label promotion of drugs and medical devices, Medicare Advantage schemes, cybersecurity cases, and trade fraud as precedent for advances in FCA enforcement. In Jenny’s view, while promoting diversity is not necessarily unlawful in and of itself, if a practice leads decision-makers to consider race or sex in employment decisions, the DOJ will scrutinize it, regardless of whether those practices have been evaluated through the lens of FCA enforcement in the past.

Scienter: How the DOJ will assess knowledge and intent

Jenny believes scienter will not be difficult to show where a company is proven to make decisions in hiring, promotion, or compensation based on race or sex. Citing past enforcement practice as precedent, Jenny said the DOJ will continue to look to both direct and indirect evidence. Direct evidence is likely to be explicit internal directions (e.g., “hire X people of Y race”) or performance criteria that expressly require race- or sex-based outcomes. According to Jenny, indirect or circumstantial evidence may also be sufficient where, in the aggregate, evidence illustrates decisions were made on the basis of protected characteristics. For example, training materials may indicate that programs cannot involve decisions based on race, but emails, meeting notes, or other documents may reveal that in practice, race is a relevant criterion (e.g., due to race-conscious scorecards, dashboards, or compensation tie-ins), revealing mismatches between disclosed policies and on-the-ground practices.

Along similar lines, Jenny emphasized that, to show scienter, the DOJ could also point to mismatches between what the company disclosed to the U.S. Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) about its recruiting policies and practices and how those policies actually were exercised in practice – for example, where internal documents reflect hiring managers were pressured to achieve specific demographic outcomes that are distinct from goals established by Executive Order 11246 affirmative action programs.³

Damages: How the DOJ may value harm

According to Jenny, damages will vary based on the scope of discrimination at issue, and that “harm” to the government’s policy goals can be remedied by deterrence and changed behavior, as well as financial recoveries. We can expect the DOJ to take a similar approach to damages as in historic FCA enforcement:

• Full contract value: Where the DOJ argues it would not have contracted had it known of the alleged discrimination, the full value of the contract constitutes single damages.
• Cost-of-program approaches: If a company used federal funds to design, run, or administer the DEI programs or policies that the DOJ believes were discriminatory, then the money spent on those programs arguably represents harm to the federal government.
• Hybrid models: Tailored to the nature of the contracts and their nexus to discrimination.

The DOJ will apply traditional FCA factors – cooperation/self-disclosure, duration and scope, senior leadership involvement, and quality of remediation – when applying multipliers. Jenny indicated that penalties will accompany damages to serve the DOJ’s deterrence goals and “vindicate the important values underlying federal entity discrimination protections.” Again, she emphasized that imprecise quantification of damages will not necessarily defeat resolution where there is strong evidence of a violation.

Our take: Deeper analysis required

While Jenny’s remarks at the qui tam conference afford contractors and grantees a valuable window into the DOJ’s Civil Rights Fraud Initiative, her remarks left many analytical questions unanswered.

Jenny made clear that the DOJ will use the FCA to challenge programs and practices that pressure managers to consider protected characteristics like race or sex in making employment decisions. She also made clear that anti-discrimination is a DOJ priority in fact, not just in rhetoric, and that such matters will receive expedited, front-office attention. But FCA cases are not won or lost on the basis of assertions that entities should have known that practices – many of which have been encouraged by the federal government as a matter of policy in the past – amounted to unlawful discrimination at the time the contracts and grants were awarded or claims were submitted. Responding to DOJ inquiries in this emerging area of FCA enforcement requires deep understanding of government contracting regulations, employment law, and FCA jurisprudence.

As Jenny effectively acknowledged, falsity might not be shown where the challenged DEI initiatives do not actually violate federal anti-discrimination laws. Moreover, it is far from clear that federal contractors would have run afoul of the FAR even if a court were to determine that their conduct violated federal anti-discrimination laws. Materiality and scienter should be difficult to establish where practices were consistent with longstanding recommendations of the OFCCP, U.S. Equal Employment Opportunity Commission, and/or advice of counsel, where similar practices were used by the federal government during the relevant period, or where agencies such as OFCCP reviewed a contractor’s challenged initiatives without objection. And, importantly, recent Supreme Court case law cited by Jenny herself as limiting the enforceability of agency guidance documents arguably limits the authority of the DOJ to reinterpret anti-discrimination laws and declare compliance with new policy to be material to payment under existing grants and contracts. Together, these and other doctrines provide meaningful grounds to challenge FCA liability, while underscoring the value of proactive compliance reviews.

In the coming months, the Hogan Lovells False Claims Act, Employment, and Government Contracts teams will continue to monitor developments and provide up-to-date analysis of the government’s efforts to invoke the FCA as part of its Civil Rights Fraud Initiative.

Authored by a multi-specialty team of lawyers from our Government Contracts, Employment, and False Claims Act teams: Jonathan Diesenhaus, Mitch Lazris, George Ingham, Michael Mason, Stephanie Yonekura, Allison Caplis, Hunter Davis, Briana Borgolini, Nicolette DeLorenzo, and Saydee Schnider.