This post was co-authored by Government Enforcement + White-Collar Defense Team lawyers Seth B. Orkand and Danielle H. Tangorre and Litigation group lawyer Mallori D. Thompson. This post was originally published as a Legal Update.
On April 10, 2026, the Department of Justice (DOJ) announced a nearly $17.1 million settlement with IBM to resolve allegations that IBM engaged in “illegal DEI practices” and violated the False Claims Act by failing to comply with anti-discrimination requirements in federal contracts. Notably, under the settlement agreement, IBM did not admit liability and expressly denied that it engaged in the conduct alleged. This settlement, and the underlying policy initiative on which it is based, have profound implications for entities that receive federal funding or have government contracts.
Background of DOJ’s Focus on DEI Programs
Most federal contracts contain provisions that require contractors to certify that it will abide by federal civil rights laws and not discriminate against job applicants or employees on the basis of race, color, national origin, or sex. On President Trump’s first day in office, he issued two executive orders requiring every federal contract or grant award to include a clause making compliance with federal anti-discrimination laws material to payment for purposes of the False Claims Act, and a certification that the contractor/grantee “does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.” The orders also direct the DOJ and other government agencies to identify and investigate “egregious” DEI practitioners in key sectors, expressly including “the medical industry.”
On July 15, 2025, then-Attorney General Pam Bondi issued a memorandum directing aggressive DOJ enforcement against race-based, sex-based, or other DEI programs maintained by any entity receiving federal funds. This memorandum directs the DOJ Civil Rights Division and U.S. Attorneys to treat receipt of any federal funds, including Medicare, Medicaid, and HHS program funds, as creating enforceable anti-discrimination compliance obligations under:
- Title VI of the Civil Rights Act;
- Section 1557 of the Affordable Care Act;
- The False Claims Act (FCA); and
- Title IX
The IBM settlement is the FCA resolution under DOJ’s Civil Rights Fraud Initiative, launched in May 2025.
IBM’s DEI-Related Conduct at Issue
The DOJ alleges that IBM took race, color, national origin, and sex into account when making employment decisions, including by:
- bonusing employees for achieving demographic recruiting targets;
- using methods to identify “diverse” candidates for hiring, transfer, and promotion, including the use of “diverse interview slates,” “diverse sources,” and altering interview eligibility criteria based on protected characteristics;
- developing race and sex demographic goals for business units and taking race and sex into account in employment decisions to make progress toward those goals; and
- offering training, partnerships, mentoring, leadership development programs, and educational opportunities to employees on the basis of race or sex.
Interestingly, the DOJ alleges that IBM engaged in the alleged conduct since at least January 19, 2019, to the present, meaning that DOJ is retroactively applying the Trump Administration’s current view of DEI programs to a period including the first Trump and Biden presidencies.
The settlement agreement suggests that the settlement amount IBM agreed to was determined on the basis of indirect costs (overhead) that IBM allocated to its federal contracts for these practices during the period covered by the agreement.
Implications for Government Contractors and HR and Compliance Departments
From a risk management perspective, this settlement is a reminder that the DOJ expressly considers DEI programs as violative of federal anti-discrimination laws. Clients that receive federal funding would be well advised to require their HR and talent teams to scrutinize DEI programs that set demographic goals and program eligibility criteria and provide incentive compensation structures on the basis of race, color, national origin, or sex.
For compliance functions, the settlement also highlights the DOJ’s continued emphasis on cooperation credit in FCA resolutions. The agreement states IBM was credited for cooperation, including early disclosure of facts relevant to the investigation gathered during IBM’s independent investigation, assistance in determining damages and penalties, and voluntary remedial measures such as terminating and/or modifying certain programs, policies, or other activities described in the covered conduct. The settlement reinforces the importance of aligning employment practices with the contractor’s government contract-incorporated obligations, and ensuring internal controls can detect and escalate potential noncompliance. The agreement’s express cooperation credit language also highlights the value the DOJ places on early factual disclosure, structured internal investigations, and documented remediation.
For government contractors, the settlement is also a cost-charging cautionary tale. The DOJ’s allegations included that IBM allocated indirect costs associated with the challenged practices to federal contracts and sought reimbursement for them. Contractors should reconsider whether allocating costs associated with overhead for diversity-related employment goals should be charged to the government.
What We Are Watching
We anticipate that this settlement is the first of many to come during the remainder of the Trump Administration. It will undoubtedly encourage whistleblowers to come forward to report race- and sex-based DEI hiring and employment activities in the hope of obtaining a portion of the government’s settlement proceeds.
We will continue to monitor how DOJ claims to satisfy the materiality element of the False Claims Act and uses the false certification theory to prosecute recipients of federal funding, such as health care entities receiving reimbursements from federal health care programs, and awardees of federal grant money required to certify compliance with federal anti-discrimination laws.