In Part I, we explored the full lifecycle of federal grants—from authorization to closeout—and the compliance responsibilities that institutions must uphold. But in 2025, understanding the mechanics is only half the battle.
As recent terminations of federal grants make headlines, legal risks around diversity, equity, and inclusion (DEI), and other political flashpoints are taking center stage. In Part II, we explain how litigation is reshaping the grant landscape—and what higher ed leaders need to know.
The Litigation Landscape: When Compliance Isn't Enough
Institutions once viewed grant termination as rare. That's no longer the case.
In the wake of new anti-DEI executive orders issued in early 2025, several federal agencies—including the Department of Education (ED) and the National Institutes of Health (NIH)—have abruptly terminated thousands of grants.
Many institutions were caught off guard. And now, they're fighting back in court.
Why Are Grants Being Terminated?
According to agency communications, many terminations were justified on the grounds that the grants:
- No longer "effectuate agency priorities"
- Involved "illegal DEI initiatives"
- Related to politically charged areas such as health equity, LGBTQ+ issues, or affiliations with certain countries
Critically, no specific misconduct or compliance violations were cited in most termination letters—only that the subject matter of the grant was now considered out of alignment with the administration's policy goals.
The Court Battles: APA, Jurisdiction, and First Amendment Claims
Grant recipients—ranging from states and nonprofits to Ivy League institutions—have filed lawsuits to get their grants reinstated. Their lawsuits invoke the Administrative Procedure Act (APA), a federal law that prohibits agencies from making arbitrary or capricious decisions.
Key legal arguments include:
- Lack of individual assessment: Termination letters sent to recipients were boilerplate, reflecting that grants were being terminated on a blanket basis without considering of the recipient's individual compliance with the grant terms.
- Failure to follow procedures: Agencies bypassed the notice-and-comment process required to change grant "priorities."
- Overreach by the executive branch: Agencies cannot defund congressionally authorized programs based solely on changing political winds.
One remedy available to plaintiffs if the APA is violated is an injunction against the agency.
Some cases also bring a First Amendment challenge, arguing that the government is unlawfully conditioning funding to coerce institutions into adopting its political views.
Recent Supreme Court Ruling: A Procedural Win for the Government
One case already made its way to the Supreme Court and resulted in a win for the government. After ED terminated over 100 teacher-related grants for conflicting with its DEI-related "priorities," the recipients sued under the APA and sought immediate injunctive relief. The district court issued an injunction requiring ED to reinstate the grants pending a future decision on the merits. But the Supreme Court, acting on ED's emergency request, said the agency could temporarily re-terminate the grants.
Importantly, the Supreme Court's decision was procedural – it did not address the merits.
The Court said that claims against the government seeking grant reinstatement likely belong in the Court of Federal Claims (CFC), not in federal district court. A federal law called the Tucker Act says that lawsuits against the United States seeking "money damages" based on the government's contractual obligation are within the CFC's exclusive jurisdiction. The plaintiffs argued they did not technically seek "money" under the grants—just their reinstatement to keep funds flowing. The Court suggested that this was a distinction without a difference.
Because it considered the issue at early stage in the case, the Supreme Court's ruling is not the final word on the jurisdictional issue. The lower courts in this case and in other similar cases will consider them on a fuller record. But it nonetheless complicates and potentially slows future litigation. Some existing lawsuits may be dismissed and then refiled in the CFC, while new lawsuits may be drafted in ways to avoid CFC jurisdiction.
Bottom line: The courts haven't ruled on the merits yet. Litigation is still ongoing, and the ultimate legality of these terminations remains unsettled.
Litigating in the Court of Federal Claims
Challenges over grant terminations that end up in the CFC will look different than APA cases heard in federal district court. The CFC typically only decides claims for breach of contract against the government, and lacks the power to award injunctive relief. This mean recipients may be precluded from getting their grants reinstated in the CFC. Instead their only remedy would be monetary—such as the funds they would have received over the remainder of the grant period had it not been terminated.
Beyond Terminations: Delays, Indirect Cost Rate Cuts, and More
Grant termination isn't the only tool being used. Institutions are also facing:
- Delayed reimbursements for already-incurred costs
- Unilateral reductions in indirect cost recovery (e.g., NIH setting a de minimis rate)
- New performance conditions added without due process
These actions may not make headlines, but they're creating real budget strain and compliance confusion at institutions large and small.
What Institutions Can Do Now
- Be Proactive with Legal Review. Involve general counselearly—especially at the proposal and award negotiation stages. Once a grant is terminated, leverage for negotiation drops significantly.
- Monitor Policy Shifts. Track changes in executive orders, appropriations law, and agency policy statements. What's compliant today may be challenged tomorrow.
- Document Everything. Meticulous records—especially of compliance efforts, subrecipient monitoring, and internal controls—will be critical if litigation arises or audits are triggered.
- Evaluate Litigation Risks Carefully. Pursuing legal action may be warranted, but it's costly. Institutions must assess which terminations are challengeable and which may not be salvageable, even with a win in court.
- Know Thy Grant. Above all, read and understand your grant award. Know the federal law that Congress passed authorizing your grant. You will be in a better position to know what the government can and cannot do and what your options are to seek relief.
The evolving legal climate around federal grants demands more than policy adherence—it requires institutions to be nimble, legally savvy, and prepared to defend their funding. While the courts weigh in on the balance of power between agencies, Congress, and the executive branch, institutions should focus on risk management, compliance, and strategic planning.
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.
