Recently, the Justice Department has made headlines for opening inquiries into how large U.S. corporations implement their diversity and inclusion hiring practices. This comes as a surprising use of a federal law initially designed to combat fraud against the government.
Traditionally, the False Claims Act was a tool for holding contractors accountable for fraudulent billing — charging the government for non-existent work or inflating costs unnecessarily. However, the Justice Department is now launching investigations based on the idea that promoting diversity in hiring could be seen as defrauding the government when a company holds federal contracts.
Modern suspects in these civil probes include major players such as Google and Verizon Communications, which have been summoned to supply documents about their diversity programs, according to sources familiar with the situation.
As the investigation spans multiple industries—ranging from automotive firms to pharmaceuticals and defense contractors—there’s no definitive list of targeted companies available. Numerous firms are reportedly meeting directly with Justice Department officials.
Edit: Both Google and Verizon have opted not to comment on the subject.
Typically, whistleblowers or internal agency accountants trigger these false claims inquiries. However, the current investigations are led by political appointees at the Justice Department who believe that any company with contracts needs to comply rigorously with their government obligations, especially regarding diversity, equity, and inclusion frameworks.
In a recent memo issued in May, Deputy Attorney General Todd Blanche indicated a directive for the Department to investigate entities receiving federal funds that might preferentially favor applicants based on their race, ethnicity, or national origin.
This memo underscores that private companies bound by government contracts could face penalties if they maintain DEI policies following former President Trump’s executive order that aimed to eliminate what he deemed discriminatory hiring practices based on race and gender. Blanche described the False Claims Act as the ‘weapon’ to target corporations and institutions that allegedly persist in such ‘racist policies.’
The Justice Department has not provided additional comments beyond previous policy statements from this year.
Observers of the legal landscape note that it’s atypical to apply this anti-fraud statute toward politically charged matters such as DEI compliance. Lisa Dykstra, a partner at the Morgan Lewis law firm, explained that companies are reconsidering their policies due to this evolving federal stance. She indicated that moves like this are rather rare, expressing that regulation based on compliance with anti-discrimination laws through fraud tactics is a new occurrence.
Notably, healthcare fraud typically represents a bulk of issues brought under the False Claims Act. Last year, for example, Teva Pharmaceuticals agreed to a hefty $425 million settlement concerning alleged fraudulent copay practices involving a multiple-sclerosis medication mixed with rising prices affecting Medicare. The defense sector has also seen substantial settlements, with Raytheon Co. paying around $428 million last year due to inflated negotiating practices with the Defense Department.
However, if the government takes companies to court over diversity monitoring allegations, proving deception could be tricky. Legal watchers are asking how the government will demonstrate that companies knowingly misrepresented their qualifications or the legitimacy of their claims when securing their government contracts.
The investigations are causing quite a stir in the corporate realm because of the severe financial ramifications at stake. Winning a civil lawsuit under the False Claims Act could lead to defendants owing triple the damages suffered by the government.
But DEI scrutiny isn’t the only non-traditional regulatory measure from the Trump administration; the Justice Department is also investigating Medicaid billing practices among doctors providing banned treatments for transgender youth in various states. Recently, more than 20 subpoenas were issued, raising concerns among patients and health facilities that legal objections may block the extensive demands for minors’ medical records.
Several court rulings have already limited or obstructed these subpoenas.
For further details, connect with Lydia Wheeler at lydia.wheeler@wsj.com
