On April 10, the U.S. Department of Justice (DOJ) announced the first settlement to resolve False Claims Act (FCA) allegations regarding a private employer’s failure to comply with anti-discrimination requirements in contracts with the federal government.
The settlement with IBM comes just two weeks after the March 26 signing of a new executive order called “Addressing DEI Discrimination by Federal Contractors” (EO 14398), curbing diversity, equity, and inclusion (DEI) programming (read more here).
Following an investigation, DOJ alleged that, from January 2019 to the present, IBM falsely certified compliance with the anti-discrimination provisions of Title VII of the Civil Rights Act of 1964 and with the Federal Acquisition Regulation (including FAR clause 52.222-26 on Equal Opportunity). IBM agreed to pay $17,077,043, inclusive of civil penalties, to resolve the matter.
The allegedly illegal practices included:
- Modifications/adjustments to pay, bonuses, or other compensation that caused employees to consider race, color, national origin, and sex when making employment decisions, including the use of a diversity modifier that tied bonus compensation to achieving demographic targets;
- Consideration of race, color, national origin, or sex in decisions to hire, transfer, or promote through use of “diverse interview slates,” “diverse sourcing,” and other employment practices including altering interview eligibility criteria based on race, color, national origin, or sex;
- Development of race and sex demographic goals for business units, taking race, color, national origin, or sex into account when making employment decisions to achieve progress towards demographic goals; and
- Offering certain training, partnerships, mentoring, leadership development programs, educational opportunities or resources, and/or similar opportunities to certain employees only, with eligibility, participation, access, or admission limited on the basis of race, color, national origin, or sex.
Voluntary Cooperation
DOJ has acknowledged that IBM “took significant steps entitling it to credit for cooperating with the government in its investigation.” These steps included disclosing facts uncovered during the company’s independent investigation; providing DOJ with information to assist in the calculation of damages and penalties; and undertaking “voluntary remedial measures, including the termination and/or modification of various programs and practices at issue.” The settlement agreement references the DOJ Guidelines for Taking Disclosure, Cooperation, and Remediation into Account in False Claims Act Matters, Justice Manual § 4-4.112.
Civil Rights Fraud Initiative
Since January 2025, the DOJ and the Trump Administration have issued multiple memos, executive orders, and other indications of an intent to use the FCA—created during the Civil War to prevent fraud on the U.S. government—as an anti-DEI enforcement tool.
The April 10 DOJ announcement credits the IBM settlement as the first under the Civil Rights Fraud Initiative (the Initiative), launched in May 2025 to utilize the FCA to “investigate and, as appropriate, pursue claims against any recipient of federal funds that knowingly violates civil rights laws.” (See here and here.) The Initiative “strongly encourages anyone with knowledge of discrimination”—meaning whistleblowers, or qui tam relators—to consider filing a qui tam action. Such individuals are often current or former employees, and significantly, the whistleblower may share in an FCA recovery.
Takeaways
Employers, especially those contracting with the federal government, should be prepared for government investigations in this area, whether initiated by DOJ or a qui tam whistleblower. As we’ve noted, EO 14398 carries the additional threat of debarment, potentially preventing entities from receiving new contracts, typically for three years.
From a defense perspective, it remains to be seen whether the government’s efforts here, particularly the “false certification” theory it pursued in the IBM matter, will withstand judicial scrutiny. Similarly, the damages methodology employed by the government, the specific calculation of which does not appear within the four corners of the settlement agreement (although, based on the number listed as “restitution,” it appears that damages exceeded a 2x multiplier), is likely to be subject to challenge as these types of matters proceed.
Moreover, the government remains obligated to demonstrate that a defendant’s actions were material to the government’s payment decision, pursuant to the unanimous 2016 Supreme Court holding in Universal Health Services, Inc. v. United States ex rel. Escobar et al. (see our blog posts here and here). Despite the government’s efforts to belatedly address this obligation through language inserted under EO 14398, we expect the issue of materiality will be subject to active challenge. Parties should consider these and other available defenses as they face investigations and enforcement actions in this space.
With respect to the IBM settlement, note that the investigation likely began in 2025, but the review extended as far back as January 1, 2019, long before the government’s initiative in this space began.
Employers, especially contractors and subcontractors, should:
- Review policies, practices, and procedures to ensure compliance with requirements including Title VII of the Civil Rights Act of 1964, the False Claims Act, EO 14398, (which addresses race and ethnicity), and EO 14173 of January 21, 2025 (which references discrimination based on race, color, religion, sex, or national origin, and remains the subject of ongoing litigation as discussed here, presently before the U.S. Court of Appeals for the Seventh Circuit).
- Stay informed about the rapidly changing interpretations of DEI-related programs and enforcement and remain “a step ahead” of any federal DEI investigation or enforcement action.
- Take affirmative steps to ensure that contracts, programs, and workforce policies related to recruitment, hiring, promotions, advancement opportunities, or other conditions of employment comply with the U.S. Constitution and federal, state, and local laws that prohibit discrimination. Note that in many instances, federal policy may conflict with state and local requirements.
- Consider voluntary compliance programs that may, as in the case of IBM, ameliorate the effects of any DOJ investigation.
Ann W. Parks and Elizabeth A. Ledkovsky contributed to this article
