DOJ Secures First False Claims Act Settlement Under Civil Rights Fraud Initiative

The U.S. Department of Justice (DOJ) on April 10, 2026, announced that IBM agreed to pay more than $17 million to resolve allegations that it violated the False Claims Act (FCA) by failing to comply with antidiscrimination requirements in its federal contracts. This is the first resolution following initiation of the Civil Rights Fraud Initiative launched in May 2025.

DOJ alleged IBM performed practices that the government contends discriminated against employees and applicants for employment on the basis of race, color, national origin or sex. The settlement underscores the current administration's commitment to leveraging the FCA, 31 U.S.C. § 3729 et seq., as an enforcement tool against what it characterizes as discriminatory diversity, equity and inclusion (DEI) practices by federal contractors.

Federal contractors and grant recipients should take immediate note of this development and carefully assess their DEI-related policies, programs and practices in light of this heightened enforcement posture.

Background: The Civil Rights Fraud Initiative

The DOJ established the Civil Rights Fraud Initiative on May 19, 2025, to utilize the FCA to investigate and pursue claims against recipients of federal funds that violate federal civil rights laws. Violations of the FCA can result in treble (3x) damages and significant penalties.

The initiative involves nationwide collaboration among federal and state law enforcement agencies, with the DOJ's Civil Fraud Section and Civil Rights Division co-leading enforcement efforts.

Remarks by DOJ earlier this year highlighted its commitment to pursuing cases under the FCA for practices it claims violate federal antidiscrimination laws contained within federal contracts. DOJ has also strongly encouraged private whistleblowers to file qui tam actions in furtherance of the initiative; successful whistleblowers typically receive a portion of any monetary recovery.

The IBM Settlement: Key Allegations

The settlement with IBM resolves government allegations that the company engaged in discriminatory employment practices while being a party to federal contracts that required compliance with antidiscrimination requirements. Acting U.S. Attorney General (AG) Todd Blanche emphasized in the announcement that "racial discrimination is illegal, and government contractors cannot evade the law by repackaging it as DEI."

DOJ alleged that as a federal contractor, IBM was required to certify that it would not discriminate against employees or applicants for employment because of race, color, national origin or sex and that it would take steps to ensure that applicants and employees are treated without regard to those characteristics.

The government alleged that IBM violated these requirements through several specific practices:

• Diversity Modifiers and Bonus Compensation. The government alleged that IBM tied bonus compensation to achieving demographic targets through the use of a "diversity modifier."
• Diverse Interview Slates. The government further alleged that IBM altered interview criteria based on race or sex through the use of "diverse interview slates" and other related employment practices in connection with identifying "diverse" candidates for hiring, transfer or promotion.
• Demographic Goals. Additionally, the government alleged that IBM developed race and sex demographic goals for business units and took race and sex into account when making employment decisions to achieve progress toward those demographic goals.
• Restricted Training and Development Programs. Finally, the government alleged that IBM offered certain training, partnerships, mentoring, leadership development programs and educational opportunities to only certain employees, with eligibility, participation, access or admission limited on the basis of race or sex.

These categories of alleged conduct are consistent with the remarks made earlier this year by Brenna Jenny, Deputy Assistant AG for the DOJ Civil Division's Commercial Litigation Branch, which is charged with enforcement under the FCA.

It is important to note that the claims resolved by the settlement are allegations only, and there has been no determination of liability. IBM for its part denied it engaged in the covered conduct.

Damages and Multiplier

The settlement does not elaborate on the basis for determining singles damages. In prior remarks, DOJ indicated determination of damages would be flexible; it would evaluate whether to use the full value of the affected contracts, the cost of "illegal" programs passed on to the government or a hybrid approach. IBM is a significant government contractor with yearly contract awards in excess of $1 billion.

The settlement is notable in that the damages multiplier exceeded 2x, a common benchmark for settled cases under the FCA. More surprising is the heightened modifier despite IBM's cited cooperation during the investigation. The DOJ acknowledged that IBM took significant steps entitling it to credit for cooperating with the government's investigation. IBM made early disclosures of facts relevant to the investigation gathered during its independent internal investigation, including information to assist in the calculation of damages and penalties. The company also undertook voluntary remedial measures, including the termination and/or modification of various programs and practices at issue.

The heightened modifier could be a signal of settlement posture in any DEI-FCA negotiations to come.

Executive Order 14398: The Latest Enforcement Framework

The IBM settlement comes on the heels of Executive Order (EO) 14398, signed by President Donald Trump on March 26, 2026, titled "Addressing DEI Discrimination by Federal Contractors." This EO, which Holland & Knight described in a previous alert, creates new contractual obligations for federal contractors and subcontractors and, more explicitly, links compliance with these obligations to FCA exposure.

Definition of "Racially Discriminatory DEI Activities"

EO 14398 defines "racially discriminatory DEI activities" as "disparate treatment based on race or ethnicity in the recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or allocation or deployment of an entity's resources." The order further defines "program participation" to include membership or participation in or access or admission to training, mentoring or leadership development programs, as well as educational opportunities, clubs, associations or similar contractor-sponsored opportunities.

Required Contract Clause

Per the order, within 30 days (by April 25, 2026), federal agencies must include a new clause in all federal contracts requiring contractors to:

1. agree not to engage in any racially discriminatory DEI activities as defined in the order
2. furnish all information and reports, including access to books, records and accounts, as required by the contracting agency to ascertain compliance
3. accept that the contract may be canceled, terminated or suspended for noncompliance and that the contractor may be declared ineligible for further government contracts
4. report any subcontractor's known or reasonably knowable conduct that may violate the clause to the contracting agency and take any remedial actions directed
5. inform the contracting agency if a subcontractor sues the contractor challenging the validity of the clause
6. recognize that compliance with these requirements is material to the government's payment decisions for purposes of the FCA

Enhanced Enforcement Mechanisms

The EO directs the AG to consider bringing FCA actions against contractors or subcontractors that violate these provisions and ensure prompt review of qui tam actions brought by private persons. Contracting agencies are also directed to suspend and debar contractors or subcontractors for failures to comply.

FCA Enforcement Theory

The DOJ's enforcement theory rests on the premise that federal contractors who maintain certain DEI-related hiring, promotion or compensation practices while certifying compliance with antidiscrimination requirements are making false statements to the government. Federal antidiscrimination laws include Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, Section 503 of the Rehabilitation Act of 1973, Equal Pay Act and Age Discrimination in Employment Act, and Pregnant Workers Fairness Act. Those laws apply regardless of any Federal Acquisition Regulation clauses expressly incorporating them into a contract or grant.

Historically, FCA enforcement has focused on billing fraud, inflated pricing or failure to deliver contracted services; this application of the statute to DEI practices represents a novel use.

For FCA liability to attach, the government must show that a contractor's alleged false certification was material to the government's payment decision. EO 14398 attempts to address this requirement by including explicit materiality language in the mandatory contract clause. Whether this contractual acknowledgment is sufficient to establish materiality as a matter of law remains an open legal question, as the U.S. Supreme Court in Universal Health Services v. United States ex rel. Escobar held that express identification of a condition as material, at least for purposes of the implied certification theory of liability, is not automatically dispositive.

The Broader Enforcement Landscape

Federal contractors should be aware that DEI-related enforcement risk is not limited to FCA actions. The U.S. Equal Employment Opportunity Commission (EEOC) has signaled an aggressive enforcement posture toward DEI programs, including the use of EEOC commissioner-initiated charges that do not depend on employee complaints. Private litigation risk has also increased, as plaintiffs' attorneys and advocacy groups may rely on the administration's legal interpretations to fuel "reverse discrimination" claims.

Notwithstanding these enforcement pressures, courts have signaled that DEI-related allegations must still satisfy traditional standing and pleading standards. Simply labeling a program "DEI" does not establish illegality; plaintiffs must demonstrate actionable adverse treatment tied to a protected characteristic under existing antidiscrimination laws.

Risk Mitigation: Practical Steps for Federal Contractors

In light of this settlement and the evolving enforcement landscape, federal contractors and grant recipients should take immediate steps to assess and manage their exposure:

• Conduct Comprehensive Program Reviews. Promptly review all DEI-related plans, programs, policies and practices to determine whether they contain any aspects that could be characterized as disparate treatment on the basis of race, color, national origin or sex. This includes hiring and promotion practices, bonus and compensation structures, training and development programs, and mentoring or leadership initiatives.
• Evaluate Employment Practices. Assess employment practices and program structures, including hiring, promotion and incentive programs, for race- or sex-specific differences in treatment. Particular attention should be paid to practices that resemble those alleged in the IBM settlement: diversity modifiers tied to compensation, demographic goals, diverse slate requirements and restricted access to professional development opportunities.
• Evaluate Practices for Staffing Contracts and Issuing Proposed Candidates. Ensure that proposals, submissions and staffing of federal contracts are in accordance with compliant practices; key personnel should be evaluated on the basis of merit and qualifications without regard to immutable characteristics.
• Review Certifications. For federal contractors, reassess certifications tied to government contracts to confirm they are supported by documented, good-faith compliance reviews.
• Document Compliance Efforts. Document all compliance reviews and decision-making processes so that any certifications made can be supported by contemporaneous evidence of a good-faith belief in their accuracy.
• Monitor Subcontractors. Given the new reporting obligations under EO 14398, establish processes to monitor subcontractor conduct and report any known or reasonably knowable violations to contracting agencies. Expect DOJ to take the position that prime contractors are expected to undertake active and affirmative compliance monitoring of subcontractor conduct.
• Update Compliance Programs. Update compliance programs and ensure internal reporting mechanisms capture discrimination issues.
• Consider State Law Implications. Evaluate whether any state-law constraints, including state antidiscrimination or affirmative action mandates, complicate federal compliance decisions.
• Prepare for Investigations. Establish protocols for responding to potential civil investigative demands from DOJ, which has been issuing such demands to federal contractors across multiple industries.

Conclusion

It has been reported for the last 14 months through multiple EOs, the launch of the Civil Rights Fraud Initiative, DOJ policy announcements and keynote addresses by DOJ leadership that FCA enforcement of illegal DEI practices was an "expedited priority" and there were "strong" cases in the pipeline. These pronouncements have now come to fruition: The IBM settlement marks a significant milestone in the administration's use of the FCA to target what it characterizes as discriminatory DEI practices by federal contractors. Combined with EO 14398's new contract requirements and materiality provisions, federal contractors face an increasingly complex compliance environment.

Organizations that contract with or receive funding from the federal government should act promptly to review their DEI-related policies, programs and practices. The government has made clear its intention to pursue additional enforcement actions, and the availability of qui tam actions means that private whistleblowers may also initiate litigation. Proactive assessment and remediation, thorough documentation and careful attention to certification accuracy are essential to managing this evolving risk landscape.

For more information or questions, please contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.