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Last week the Department of Justice announced that IBM agreed to pay $17 million to resolve allegations that it violated the False Claims Act (FCA) by engaging in illegal race- and ethnicity-based discrimination through DEI practices in connection with federal contracts. This settlement is one of the most significant developments in DEI enforcement to date, and it has far-reaching implications for federal contractors and subcontractors of all sizes and industries: this settlement means that the government’s DEI enforcement posture has moved past the aggressive rhetoric set forth in prior Executive Orders (specifically, to executive orders issued in January 2025 and March 2026 (the “January 2025 EO” and the “March 2026 EO”)) to a commitment to exacting concrete consequences.

ANALYSIS OF THE SETTLEMENT

According to the settlement, IBM allegedly engaged in racially discriminatory DEI practices in connection with the performance of federal contracts, including practices that favored or disfavored individuals based on race or ethnicity in hiring, promotion, and program participation. Notably, this matter does not appear to have originated via a qui tam whistleblower complaint. Rather, the settlement reflects what appears to be a self-disclosure by IBM, and the settlement credit IBM received is consistent with that conclusion. Also of note is that the conduct at issue dates back to 2019 – years before the January 2025 EO and before the March 2026 EO, which expressly designated DEI compliance as “material” under the False Claims Act.

In the agreement, IBM explicitly denied wrongdoing, and importantly, settlements themselves do not establish that a government’s position is correct. However, as the first resolution under the DOJ’s Civil Rights Fraud Initiative targeting DEI programs, the settlement follows the two EOs setting forth directives on DEI violations. The settlement is consistent with DOJ’s current position that DEI practices can be “material” to payments made on a federal contract even before the March 2026 EO declared it so. The FCA imposes liability on any person who knowingly submits a false or fraudulent claim for government payment. A critical element the government must prove to establish liability under the FCA is materiality — the false statement or omission must be material to the government’s decision to pay. The March 2026 EO established DOJ’s position on this point by requiring inclusion of a mandatory contract clause expressly stating that compliance with the EO’s requirements “are material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code.” The IBM settlement suggests that DOJ has taken, and for the foreseeable future will continue to take, the position that DEI-related discriminatory practices were material to payment decisions even before the March 2026 EO’s requirement that contractors acknowledge such compliance as “material to the Government’s payment decisions.”

While IBM’s apparent self-disclosure and the credit it received is noteworthy, DOJ’s aggressive position on what constitutes – and in the past constituted – a violation of federal civil rights laws in the DEI context, has not been tested in the courts and if tested may not ultimately prevail. IBM chose to settle rather than litigate, a decision that may have been driven by the specifics of its particular circumstances and unrelated to the legal merits. Other contractors may reach different conclusions based on the nature of their DEI programs, the strength of their legal defenses, their financial circumstances and risk tolerance. There are strong arguments that many DEI practices predating the executive orders would not constitute knowing false statements, and that such statements, even if false, would not have been material to the government’s payment decisions at the time they were made. That said, the settlement signals that DOJ intends to reward proactive disclosure where contractors determine it is appropriate: contractors who identify problematic practices and self-disclose may be able to negotiate more favorable resolutions than those who are investigated or later named in a qui tam lawsuit. For government contractors that have not yet conducted a privileged DEI compliance review, the IBM settlement may raise reasons for doing so.

The settlement’s retroactive reach to 2019 is important. The FCA has a six-year statute of limitations (and up to ten years in some circumstances). This means that contractors face potential exposure for DEI practices that predate the current administration. These practices may have been implemented under prior diversity mandates or corporate ESG initiatives and never reviewed for FCA compliance because they were not understood to create government contracting risk at the time. In fact, the prior administration actively promoted and strengthened DEI requirements for federal contractors and federal funding recipients through Executive Orders that mandated anti-discrimination certifications and expanded data reporting. Nevertheless, the current administration’s efforts to restrict DEI mean that contractors should not assume historical DEI practices are beyond the reach of aggressive enforcement merely because such practices predated the current executive orders.

PRACTICAL TAKEAWAYS FOR FEDERAL CONTRACTORS

With the March 2026 EO now in effect, the enforcement landscape is significantly more perilous than it was when IBM’s conduct began. That latest EO on DEI:

• Mandates inclusion of an FCA materiality clause in all covered contracts and subcontracts, including lower-tier subcontracts;
• Directs the Attorney General to actively consider bringing FCA actions against contractors engaging in racially discriminatory DEI activities;
• Requires the Attorney General to expedite review of qui tam whistleblower complaints related to DEI in federal contracting within 60 days; and
• Requires contractors to affirmatively report known or “reasonably knowable” subcontractor DEI violations.

In other words, where the IBM settlement reflects enforcement under existing law, future enforcement will occur in an environment with explicit contractual FCA hooks, mandatory reporting obligations, and an actively directed DOJ enforcement program.

Although the IBM matter appears not to have been initiated by a whistleblower, future cases likely will. The EO’s direction to the Attorney General to expedite review of qui tam complaints signals that the government intends to use this FCA private enforcement mechanism aggressively. Any employee, competitor, or subcontractor who is aware of DEI practices at a federal contractor now has both the legal framework and the government’s stated enforcement priority to support a qui tam action. The potential for treble damages plus civil penalties makes such actions financially attractive to relators and their counsel.

In light of the IBM settlement and the March 26, 2026 EO, we recommend that federal contractors and subcontractors take the following steps:

1. Conduct a privileged DEI audit. Review all DEI-related programs, policies, and practices — including hiring, promotion, mentoring, leadership development, ERGs, and supplier diversity programs — for race- or ethnicity-based disparate treatment as defined in the EO.
2. Conduct fact-specific legal analysis. Assess the legal merits, under current case law, of the government’s position in the EO as it relates to the contractor’s specific programs.
3. Assess historical exposure. Given the retroactive reach demonstrated by the IBM settlement, review practices going back to at least 2019 to identify any potential FCA exposure. Note that there are strong arguments that many DEI practices predating the executive orders would not constitute knowing false statements, and that such statements, even if false, would not have been material to the government’s payment decisions at the time they were made. The government will face significant challenges in establishing both materiality and the requisite knowledge element for conduct that predated the executive orders, particularly where such conduct was consistent with then-prevailing federal policy and industry norms.
4. Review subcontractor relationships. The EO imposes obligations regarding “reasonably knowable” subcontractor conduct. Contractors should review their supply chains and consider what diligence they need to perform on subcontractor DEI practices.
5. Evaluate self-disclosure. Where a privileged audit identifies potential exposure, carefully evaluate with counsel whether a self-disclosure is appropriate, balancing the risk of heavy-handed penalties against potential benefits of early self-disclosure, including cooperation credit, more favorable resolution terms. Other critical considerations include the strength of available legal defenses, the nature and scope of the practices at issue, and litigation risk tolerance.
6. Update contract compliance programs. Ensure that compliance programs, certifications, and training reflect the requirements of the March 2026 EO and the mandatory contract clause that agencies are required to include in all covered contracts within 30 days.
7. Monitor FAR amendments. The Federal Acquisition Regulatory Council is required to issue interim guidance within 60 days of March 26, 2026. Contractors should monitor for and promptly review this guidance when issued.

The IBM settlement may be just the first of its kind, previewing what federal contractors can expect in the current enforcement environment. The combination of existing FCA exposure (as demonstrated by conduct dating to 2019), the March 2026 EO’s explicit FCA materiality designation, the Attorney General’s directed enforcement mandate, and the elevated qui tam risk creates an enforcement landscape that demands careful attention. At the same time, DOJ’s position on the scope of FCA liability for DEI practices, particularly for conduct predating the executive orders, remains untested in the courts, and contractors may have strong legal defenses depending on the nature of their programs and the circumstances under which they were implemented. The appropriate response will vary by contractor and should be informed by a thorough, privileged assessment of both the legal merits and the practical risks.