This is the fourth blog in a series on the False Claims Act (FCA), 31 USC §§ 3729, et seq., which targets any person that knowingly submits false claims for payment or false statements material to false claims to the US government.
You can check out our previous posts here: part 1, part 2, and part 3.
Generally, to prove a false claim under the FCA, the government must establish three elements:
- Falsity;
- Knowledge; and
- Materiality
This post examines the materiality element, poised to grow in legal significance in light of the Trump administration’s attempt to make compliance with federal anti-discrimination laws and a new DEI clause in federal contracts per se material under the FCA.
FCA liability requires that relevant misrepresentations be material to the government’s decision to pay the contractor’s claim. The statute defines “material” as:
“having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”
If you read closely, you will notice that the misrepresentation need not actually influence the government’s decision to pay in the case at hand to be material. However, the US Supreme Court has also instructed that the government cannot prove materiality simply by showing that it would have the option to withhold payment due to the noncompliance.
The Supreme Court’s Guidance in Escobar
In Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016), the Supreme Court clarified that materiality is a “rigorous” and “demanding” standard, meant to prevent ordinary contract breaches from being prosecuted as fraud. The government’s designation of a contract term as a condition of payment does not make it automatically material under the FCA, though it may be evidence supporting materiality.
Escobar arose from a qui tam action (i.e., a suit brought by a whistleblower, or relator) alleging that a healthcare provider knowingly submitted Medicaid reimbursement claims for services performed by unqualified health professionals, making them fraudulent. The claims billed the government for services that applicable regulations required only be performed by qualified individuals or under adequate supervision, and the defendant healthcare provider failed to disclose violations of those regulations such as utilizing underqualified staff.
The Supreme Court explained that failing to disclose critical regulatory noncompliance when billing the government—such as billing for services performed by unqualified staff—can render a claim misleading and therefore false. This is called the implied false certification theory of FCA liability.[1] However, liability will only attach where the implied misrepresentation about compliance with a statutory, regulatory, or contractual requirement is material to the government’s payment decision.
In defining materiality, the Supreme Court clarified that it is not enough that the government would have the option to decline payment if it knew of the implied misrepresentation. Rather, evidence must show that the misrepresentation would have actually influenced payment. For example, the Supreme Court explained that if the government routinely pays claims despite knowledge of a particular contractual noncompliance, that type of noncompliance likes it not material. Moreover, if the government pays a particular claim in full despite actual knowledge that certain requirements were violated, it would be very strong evidence that those requirements are not material. In addition, materiality cannot be found where the defendant’s noncompliance is minor or insubstantial.
DEI Executive Orders and the Civil Rights Fraud Initiative
In 2025, the Department of Justice announced a new “Civil Rights Fraud Initiative,” noting that it will use the FCA to pursue federal contractors and recipients of federal funds who knowingly violate federal anti-discrimination laws like Title IV, Title VI, and Title IX, of the Civil Rights Act of 1964, including while engaging in DEI programs and activities.
The new initiative followed Executive Order 14173 (Ending Illegal Discrimination and Restoring Merit-Based Opportunity), through which the administration dissolved the equal opportunity framework that had governed federal contracting for decades and eliminated most affirmative action requirements for federal contractors. Notably, the administration explicitly invoked the FCA as a consequence for noncompliance. EO 14173 mandated that agencies implement new contract terms requiring contractors and grant recipients to (1) certify compliance with federal anti-discrimination laws, and (2) agree that their compliance with those anti-discrimination laws is material to the government’s payment decisions under the FCA.
In March 2026, the administration issued Executive Order 14398 (Addressing DEI Discrimination by Federal Contractors), creating yet another new DEI-related contract clause to be inserted in all federal contracts, subcontracts, and contract-like instruments prohibiting racially discriminatory DEI activities by contractors. Like EO 14173, the EO 14398 attempts to establish per se materiality of the new clause: “The contractor recognizes that compliance with the requirements of this clause are material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act).” Agencies must incorporate the new clause within 30 days of the EO.
Given the Supreme Court’s guidance in Escobar that conditions of payment are not automatically material under the FCA, it is unlikely that the administration’s new contract terms will have the intended legal effect. Without more, declaring a contract requirement to be material should be no different legally than declaring the requirement a condition of payment. The government should need to take action to enforce the DEI clauses, e.g., audit compliance, deny payment for noncompliance, etc., to establish evidence of materiality sufficient to prove an FCA case.
Courts have yet to weigh in on the issue, though, and contractors and grant recipients should be aware of the risk presented by the new terms as they are incorporated into federal contracts. If courts allow the government to establish per se materiality of the DEI-related clauses, it will be vital for defendant contractors to combat the knowledge and falsity elements of FCA liability. Contractors must understand the administration’s interpretation of federal anti-discrimination laws, which differs from prior administrations’, and review and revise internal policies and practices to demonstrate their efforts to comply.
[1] The Supreme Court explained in Kousisis v. United States, 605 U.S. 114 (2025), that materiality is also an element of liability under a fraudulent inducement theory—a separate, judicially recognized theory of FCA liability.