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We recently walked through the administration’s growing web of restrictions on diversity, equity, and inclusion (DEI) activities by federal contractors, including the “Addressing DEI Discrimination by Federal Contractors” Executive Order (EO 14398), the Federal Acquisition Regulation (FAR) Council’s rollout of FAR 52.222‑90, the lawsuit challenging EO 14398 and the FAR guidance, the Office of Management and Budget’s (OMB) proposed rule, and the fast-approaching July 24, 2026 deadline for contract modifications. Three new developments are significant and warrant an update.
State attorneys general challenge the Executive Order and its implementation
On June 10, 2026, attorneys general (AG) from 20 jurisdictions (19 states and D.C.) filed suit in the U.S. District Court for the District of Maryland (Case No. 1:26‑cv‑02322), naming more than 50 federal defendants and challenging the implementation of EO 14398.
The central claim in the states’ complaint is that the definition of “racially discriminatory DEI activities”—“disparate treatment based on race or ethnicity” in recruitment, employment, contracting, program participation, or resource allocation—never explains what conduct is actually prohibited or how the new clause differs from existing antidiscrimination law.
The complaint illustrates the ambiguity of concrete hypotheticals: Would forwarding a job listing to a contact at a historically Black college constitute prohibited “disparate treatment” in “recruitment”? Would implementing anti-discrimination training in response to workplace antisemitism be barred as disparate treatment in “allocation or deployment” of resources? Would attending a job fair in a predominantly white rural community qualify? The states argue that this lack of clarity unlawfully chills lawful conduct, increases compliance costs, and invites inconsistent enforcement, which are particularly serious concerns given that noncompliance can result in debarment and False Claims Act liability.
The complaint also raises procedural and administrative-law claims, including that the FAR Council skipped required notice-and-comment rulemaking, exceeded its statutory authority, acted arbitrarily by ignoring 60 years of contrary policy and contractors’ reliance interests, and violated the Paperwork Reduction Act.
The plaintiffs seek to vacate the EO 14398 rollout and a preliminary and permanent injunction. The FAR Council has estimated that as many as 640,000 contracts with more than 34,000 unique vendors could be affected. Unless a preliminary injunction is granted (see note below), contractors cannot rely on this litigation to delay the July 24, 2026, compliance deadline.
Plaintiffs move for preliminary injunction in separate contractor challenge
On June 4, 2026, a group of plaintiffs—including the National Association of Diversity Officers in Higher Education (NADOHE), the American Association of University Professors (AAUP), the National Association of Minority Contractors (NAMC), and NAMC–DMV—moved for a preliminary injunction and statutory stay in a related case (Case No. 8:26‑cv‑01532), seeking to block EO 14398 and the FAR Council’s implementation guidance before the July 24, 2026 compliance deadline.
The plaintiffs argue they are likely to succeed on the merits because the Executive Order and FAR implementation violate the First and Fifth Amendments by unlawfully restricting protected speech and association, discriminating based on content, and imposing unconstitutional conditions, and because it is unconstitutionally vague. They also contend that the FAR implementation violates the Administrative Procedure Act by adopting the Executive Order without reasoned justification, ignoring reliance interests, and bypassing required rulemaking.
On the element of irreparable harm, the plaintiffs point to the “lose-lose-lose choice” that contractors face: self-censor, forgo government work, or risk liability. Organizations like NAMC report lost sponsorships and widespread self-censorship on topics protected by the First Amendment. The plaintiffs argue that loss of constitutional freedoms, even briefly, constitutes irreparable injury, and that the balance of equities favors relief because the government suffers no harm from an injunction blocking likely unconstitutional enforcement.
The plaintiffs seek to enjoin EO 14398, stay the FAR implementation, and require the government to strike any language already inserted into contracts. Contractors should monitor this case; a favorable ruling could provide near-term relief, but absent an injunction, compliance obligations remain enforceable.
The Small Business Administration proposed rule
On June 10, 2026, the U.S. Small Business Administration (SBA) published a proposed rule that would fundamentally reshape who qualifies for the Section 8(a) Business Development program.
Background
The 8(a) program gives contracting preferences to small businesses owned by “socially and economically disadvantaged” individuals. For decades, members of designated racial and ethnic groups were automatically presumed to qualify. In 2023, a federal court struck down that presumption as unconstitutional under the Fifth Amendment in Ultima Services Corp. v. USDA, 683 F. Supp. 3d 745 (E.D. Tenn. 2023), and in November 2025, DOJ told Congress it would no longer defend the presumption in court.
The proposed new test
The SBA wants to replace all existing standards with a single, race-neutral test. Under the new framework, any U.S. citizen could challenge an 8(a) program by showing (1) that a government, university, or corporation discriminated against or favored certain racial, ethnic, or cultural groups and (2) that the individual was materially harmed as a result. Notably, qualifying examples of discrimination expressly include “unlawful DEI programs or policies,” affirmative-action programs, and race-based quotas.
Relationship to the broader DEI framework
While legally distinct from the executive orders and the OMB proposed rule, the SBA proposal reflects the same policy direction. Contractors participating in or competing against 8(a) firms should evaluate whether the revised standards affect the competitive landscape for set-aside and sole-source contracts.
Comments
Comments are due 30 days after Federal Register publication.
What should contractors do now?
Our prior recommendations still hold: Conduct a privileged assessment of current programs against EO 14398 and the July 2025 AG Guidance; prepare for contract modifications (due July 24, 2026); address subcontractor risk by establishing flow-down requirements and compliance monitoring; understand False Claims Act exposure; and consider submitting comments on the OMB proposed rule (due July 13, 2026). In addition:
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Monitor both Maryland lawsuits. A preliminary-injunction motion is now pending in the NADOHE case (Case No. 8:26-cv-01532). No motion for injunctive relief has yet been filed in the state AGs’ case (Case No. 1:26‑cv‑02322).
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Do not delay compliance. Without an injunction, compliance obligations with EO 14398 are enforceable when incorporated into existing and new contracts.
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Consider submitting comments. Comments on the OMB proposed rule remain due on July 13, 2026. Comments on the SBA proposed rule are due 30 days after Federal Register publication.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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