New Era In FCA Enforcement: Lessons For Federal Contractors From IBM's $17.1 Million DEI Settlement

On April 10, the DOJ announced a $17.1 million settlement with International Business Machines Corporation (IBM) resolving allegations that IBM violated the False Claims Act (FCA) by failing to comply with anti‑discrimination requirements in its federal contracts.¹ The government alleged that certain employment and DEI-related practices at IBM unlawfully considered race, color, national origin, or sex in hiring, promotion, compensation, and access to training and advancement opportunities. In agreeing to the settlement, IBM nonetheless denied the allegations.

This marks the first non-higher education enforcement action resolved under the DOJ’s Civil Rights Fraud Initiative, which the current administration launched in May 2025 to pursue federal contractors that allegedly engage in discriminatory practices while certifying compliance with civil rights laws as a condition of receiving federal funds. For these companies, IBM’s settlement signals a significant step in enforcement: actively using the FCA to penalize DEI practices by federal contractors that the government contends are discriminatory.

This alert outlines key takeaways from the settlement for federal contractors and highlights practical steps companies can take to reduce the risk of investigation.

The Investigation Landscape Was Already Taking Shape

The DOJ‑IBM settlement is the product of an evolving shift in federal enforcement priorities which began over a year ago. The legal risk associated with private sector DEI programs began in January 2025 when President Donald Trump issued the executive order 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity (the Order), which identified DEI initiatives as a vehicle for "illegal" and "dangerous, demeaning, and immoral race- and sex-based preferences."²

The Order also signaled to companies that DEI would be a heightened focus of FCA enforcement. It required each federal contractor and grant recipient to "certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws" and "agree that [their] compliance in all respects with all applicable Federal anti-discrimination laws is material."³

DOJ has since intensified its efforts to use the FCA to police "illegal DEI" practices by federal contractors and grant recipients.⁴ In May 2025, Deputy Attorney General Todd Blanche issued a memorandum announcing the launch of the Civil Rights Fraud Initiative. The memorandum explained that the cost for noncompliance could be significant, since FCA violations result in treble damages as well as steep penalties, currently ranging as high as $28,619 per violation.⁵ Shortly thereafter, former Attorney General Pam Bondi issued a memorandum to federal contractors describing the type of practices the Initiative would target, including hiring or promotion preferences tied to demographic characteristics and training programs alleged to stereotype or disadvantage employees based on protected traits.⁶

In March 2026, President Trump issued a new Executive Order regarding procurement, entitled Addressing DEI Discrimination by Federal Contractors (EO 14398).⁷ EO 14398 asserts that "illegal DEI" practices create artificial costs, increase workforce turnover, and hinder professional collaboration.⁸ It required all federal contracts subject to the Federal Property and Administrative Services Act to include a clause prohibiting contractors and their subcontractors from engaging in racially discriminatory DEI activities and an acknowledgment that compliance is material for purposes of the FCA, by the deadline of April 24, 2026.⁹ It also explained that material noncompliance triggers liability and can lead to contract termination, suspension and/or debarment.¹⁰

The IBM Settlement

The Alleged Misconduct

The settlement is based on allegations that IBM violated federal contract provisions requiring that contractors treat all employees and applicants without regard to race, color, national origin, or sex. The DOJ’s allegations identified multiple specific practices forming the basis of the alleged FCA violations:

• Tying Compensation to Demographics: Using a "diversity modifier" that linked bonus compensation to the achievement of specific demographic targets.
• Candidate Interview Criteria: Utilizing "diverse interview slates" and other practices to give preferential treatment to candidates based on race or sex during hiring, transfers, or promotions.
• Demographic Quotas: Developing race and sex demographic goals for business units and making employment decisions to achieve progress toward those goals.
• Professional Development: Offering training, partnerships, mentoring, leadership programs, and educational opportunities limited to certain employees based on race, color, national origin, or sex.¹¹

The settlement covers IBM’s conduct from January 1, 2019, through April 10, 2026, when IBM and the government signed the agreement.

Mitigating Factors and Cooperation Credit

The DOJ noted that IBM "took significant steps entitling it to credit for cooperating with the government in its investigation."¹² Those steps include:

• Prompt Disclosure: Sharing early facts that were relevant to the government’s investigation and gathered during IBM’s independent investigation.
• Assistance in Damage Calculation: Providing information to help the government determine damages and penalties; and
• Voluntary Remediation: Terminating or modifying programs, policies, and practices.¹³

This credit comes as no surprise: the DOJ’s cooperation credit framework applicable to FCA settlements—which is reflected in Justice Manual § 4‑4.112 and increasingly cited in FCA settlement agreements—permits a reduction in penalty when companies provide meaningful disclosure, cooperation, and remediation.¹⁴ Under that policy, cooperation credit is typically not quantified in FCA settlement agreements or press releases, unlike the more easily quantifiable credit offered under the Corporate Enforcement Policy, which is now applicable to all criminal matters department-wide.¹⁵

Generally, cooperating with the government can also help reduce the risk of collateral consequences such as suspension or debarment. Indeed, the government has not proposed IBM for debarment; however, it should be noted that the settlement agreement does not shield IBM from future administrative action. Instead, it expressly excludes from release "any administrative liability or enforcement right, or any administrative remedy, including the suspension and debarment rights of any federal agency," leaving the door cracked for IBM to face further government sanction.¹⁶ Significantly, the settlement also does not preclude individual employees from bringing separate employment discrimination charges or lawsuits arising from the same conduct.¹⁷

What This Means for Federal Contractors and Subcontractors

This settlement confirms that close scrutiny of DEI initiatives is a priority of the current administration. Deputy Attorney General Todd Blanche has explicitly stated that contractors cannot "evade the law by repackaging [racial discrimination] as DEI."¹⁸ Moreover, DOJ has expressly encouraged and incentivized private whistleblowers to bring qui tam actions advancing this DEI‑based theory of liability.¹⁹

Meanwhile, the government is equipping itself with additional tools to pursue FCA claims. Shortly after the announcement of the IBM settlement, the Federal Acquisition Regulatory Council issued guidance implementing EO 14398 by adopting a new clause in federal contracts barring federal contractors and subcontractors from engaging in "racially discriminatory DEI activities" through a model deviation,²⁰ allowing for its immediate incorporation in contracts without formal rulemaking.²¹ The deviation clause imposes stricter compliance obligations and expands agency audit authority to require federal contractors to produce "books, records, and accounts" to verify compliance with EO 14398’s DEI directives.²²

Because DEI-based FCA enforcement is still evolving, how the government will establish materiality remains largely untested in court. But the Supreme Court’s decision in Kousisis et al. v. United States suggests where that analysis may head: while the Court confirmed that fraud liability does not require economic loss, the concurring opinion highlights materiality as the central constraint on FCA claims going forward.²³ Justice Thomas cautioned that not all contractual requirements—particularly those grounded in policy or regulatory objectives—should be presumed "material" to the government’s payment decision absent evidence that they go to the "essence of the bargain."²⁴ This is arguably true even where federal contracts expressly require contractors to agree that compliance is "material."²⁵ Hence, materiality is likely to become a central battleground in FCA cases, with defendants challenging whether such requirements genuinely affect payment decisions in practice—particularly where the government receives full contract performance despite alleged noncompliance.

Navigating this landscape requires careful assessment to identify which specific practices carry FCA risk and whether discontinuation or, alternatively, refinement of those practices is advised.

To mitigate these risks, we recommend that federal contractors:

• Audit Their DEI Practices: Review all diversity initiatives (both current and historical, if within the FCA’s statute of limitations) to ensure they do not "sort, prefer, or disadvantage" individuals based on protected characteristics.²⁶ This is ideally accomplished through independent outside counsel, so that all findings, conclusions, and recommendations are protected by the attorney-client privilege.
• Evaluate Compensation Metrics: Ensure that no bonus or incentive structures are tied directly to demographic quotas or targets.
• Review Training Eligibility: Confirm that all leadership and development programs are open to all qualified employees regardless of race or sex.
• Conduct Employee Training on Policy Modifications. Modify written policies and procedures and train employees on any such modifications to DEI programs based on these reviews.

Our firm is available to conduct privileged assessments of current employment practices. Federal contractors, subcontractors, and grant recipients that have not already done so should promptly review their DEI‑related policies, programs, and practices to ensure they can withstand scrutiny and adjust where necessary. In addition to conducting proactive audits, we can help with advising on disclosure strategy after conducting an internal investigation or with defense of DEI-related matters before the federal government.

Footnotes

1. US Department of Justice, Press Release, IBM Pays $17 Million to Resolve Allegations of Discrimination Through Illegal DEI Practices, https://www.justice.gov/opa/pr/ibm-pays-17-million-resolve-allegations-discrimination-through-illegal-dei-practices (Apr. 10, 2026).

2. Executive Order 14173: Ending Illegal Discrimination and Restoring Merit-Based Opportunity, 90 Fed. Reg. 8633 (Jan. 21, 2025).

3. Id.

4. Id.

5. US Department of Justice, Deputy Attorney General Todd Blanche, Civil Rights Initiative, https://www.justice.gov/dag/media/1400826/dl?inline (May 19, 2025).

6. Office of the Attorney General, Guidance For Recipients of Federal Funding Regarding Unlawful Discrimination, https://www.steptoe.com/a/web/sxQDo5AGZTjBa1kcbmTV35/20250729-ag-bondi-memo-guidance-for-recipients-of-federal-funding-regarding-unlawful-discrimination_0.pdf (July 29, 2025).

7. Executive Order 14398: Addressing DEI Discrimination by Federal Contractors, https://www.whitehouse.gov/presidential-actions/2026/03/addressing-dei-discrimination-by-federal-contractors/ (Mar. 26, 2026).

8. Id.

9. Id.

10. Id.

11. US Department of Justice, Press Release, IBM Pays $17 Million to Resolve Allegations of Discrimination Through Illegal DEI Practices, https://www.justice.gov/opa/pr/ibm-pays-17-million-resolve-allegations-discrimination-through-illegal-dei-practices (Apr. 10, 2026).

12. Id.

13. Id.

14. US Department of Justice, Justice Manual § 4‑4.112 (May 7, 2019).

15. See DOJ’s New Corporate Enforcement Policy for the Criminal Division and its Impact on Cases handled by other Divisions, Steptoe Investigations & Enforcement Blog (Jan. 31, 2023); and DOJ Confirms New Corporate Enforcement Policy Applies to Export Control and Sanctions Matters, Steptoe International Compliance Blog (April 2, 2026).

16. Id.

17. In July 2025, IBM settled Dill v. International Business Machines Corp in the Western District of Michigan, a private discrimination lawsuit brought by an employee alleging IBM terminated him to meet its diversity goals. See No. 1:24-cv-00852, ECF No. 47 (July 7, 2025) (stipulation of dismissal with prejudice). The suit also alleged IBM applied a "diversity modifier" to executive compensation, rewarding leaders for diversifying their team. Id. at ECF No. 1 (Aug. 20, 2024) (complaint). The settlement followed the court’s March 2025 denial of IBM’s motion to dismiss, finding the claims of incentives for alleged reverse discrimination plausible. Id. at ECF No. 29 (Mar. 26, 2025) (order on motion to dismiss).

18. US Department of Justice, Press Release, IBM Pays $17 Million to Resolve Allegations of Discrimination Through Illegal DEI Practices, https://www.justice.gov/opa/pr/ibm-pays-17-million-resolve-allegations-discrimination-through-illegal-dei-practices (Apr. 10, 2026).

19. US Department of Justice, Press Release, Justice Department Establishes Civil Rights Fraud Initiative, https://www.justice.gov/opa/pr/justice-department-establishes-civil-rights-fraud-initiative (May 19, 2025).

20. Federal Acquisition Regulation Council, FAR Part Deviation Guidance, Solicitation Provisions and Contract Clauses FAR § 52.222-90 (Mar. 16, 2026)

21. Federal Acquisition Regulation Council, Memorandum, FAR Council Guidance to Implement EO 14398, https://acquisition.gov/sites/default/files/page_file_uploads/FAR%20Council%20Guidance%20to%20Implement%20EO%2014398.pdf (Apr. 17, 2026).

22. Id.

23. Kousisis et al. v. United States, 605 U.S. 114 (2025)

24. Id at 138.

25. Id.

26. US Department of Justice, Press Release, IBM Pays $17 Million to Resolve Allegations of Discrimination Through Illegal DEI Practices, https://www.justice.gov/opa/pr/ibm-pays-17-million-resolve-allegations-discrimination-through-illegal-dei-practices (Apr. 10, 2026).