Materiality Takes Center Stage After SCOTUS’ Kousisis Decision: Implications for DEI and Federal Contracting

Takeaways

• SCOTUS held that liability under federal fraud statutes can extend to misrepresentations even absent proof of economic loss.
• The decision may affect enforcement of current federal priorities, including EO 14173 and DOJ’s Civil Rights Fraud Initiative (which plans to pursue False Claims Act actions based on alleged violations of nondiscrimination laws).
• Under the False Claims Act, alleged false statements must have a direct connection to a government decision to contract or pay, i.e., they must be “material.”
• Contractors and grant recipients should review DEI-related programs, policies, and practices under privilege to address potential Title VII compliance issues and reduce False Claims Act risk.

Related links

• United States v. Kousisis
• “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” (EO)
• DOJ Civil Rights Fraud Initiative Ups FCA Risks for Federal Fund Recipients Employing Unlawful DEI Programs
• Memo from Deputy Attorney General Blanche: Civil Rights Fraud Initiative
• DOJ Releases DEI Guidance
• Memo from AG Bondi: Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination

Article

The materiality of alleged violations of federal fraud statutes, including the False Claims Act (FCA), is expected to increase in importance given a recent U.S. Supreme Court decision and the shifting priorities at the Department of Justice (DOJ) for federal contractors.

Kousisis

In United States v. Kousisis, 145 S. Ct. 1382 (2025), the Supreme Court held that federal mail and wire fraud liability can extend to misrepresentations even without proof of economic loss. The ruling comes as the White House, with Executive Order 14173 (“Ending Illegal Discrimination and Restoring Merit-Based Opportunity”) (EO), seeks to make compliance with Title VII of the Civil Rights Act a material contract term and the DOJ prioritizes its enforcement efforts under the FCA.

Materiality remains an important check, however. The Court also emphasized this element, first articulated in 2016 in Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176: Liability attaches only if the misrepresentation would have mattered to the government’s contracting or payment decision.

Kousisis changes the fraud liability landscape by making clear there is no economic-loss element, but materiality remains critical.

Materiality Framework

The Kousisis Court reaffirmed that materiality turns on:

• Whether the misstatement induced the government’s decision to contract or pay;
• Whether a reasonable official would view it as important; and
• Whether the speaker knew it mattered to the decision-maker (inducement, objective importance, and knowledge of importance).

These factors remain the analytical backbone of the materiality analysis, which in turn plays an important role in defining the limits of actionable fraud.

Justice Clarence Thomas, writing for a unanimous Court in Escobar, explained that trivial errors do not touch the essence of the bargain. For instance, a contractor’s use of foreign-made staplers despite contract terms to the contrary or minor paperwork errors may technically breach a contract, but they are not material to the “essence of the bargain.” Those kinds of deviations from the contract would not reasonably influence the government’s decision to pay.

The reasoning from Escobar carried forward into Kousisis. In a concurrence, Justice Thomas questioned whether alleged misrepresentations about minority hiring could be material when “the contracts in this case were for bridge repairs, not minority hiring.” In other words, fraud liability does not extend to every technical or ancillary misrepresentation in a contract; the alleged falsehood must go to the heart of the deal.

Why Federal Contractors’ Compliance with Nondiscrimination Laws Matters Now

Two recent policy shifts make Title VII compliance paramount for federal contractors and grant recipients today:

1. EO 14173. This Executive Order directs agencies to require contractors to certify their “compliance in all respects with all applicable Federal anti-discrimination laws” as an express term in every federal contract. This language arguably makes Title VII compliance part of the bargain itself, but courts have not yet resolved the question. Certifying nondiscrimination compliance is no longer boilerplate — it creates legal and financial risk.
    
2. DOJ Civil Rights Fraud Initiative and July 2025 guidance. DOJ has identified enforcement against false Title VII compliance certifications as a stated priority. Its July 2025 guidance warns of specific “unlawful practices” and identifies “best practices” that, while technically non-binding, function as enforcement benchmarks. The message is that contractors whose DEI practices fall outside these parameters may face heightened scrutiny.

A contract expressly designating nondiscrimination compliance as “material” may not end the inquiry, however. Under Escobar and Kousisis, materiality turns on whether the alleged misrepresentation would have influenced the government’s decision to contract or pay. In practice, contractors should assume agencies will treat such certifications as central while recognizing that, in litigation, courts retain ultimate authority to decide materiality.

In today’s environment, where EO 14173 and DOJ policy elevate DEI scrutiny, contractors should expect heightened attention. Because FCA cases may arise now even without measurable financial loss, accuracy in compliance with nondiscrimination certifications is more critical than ever.

If you have questions about how these developments may affect your organization’s compliance obligations or would like a privileged review of DEI-related programs, policies, and practices to help ensure and strengthen your organization’s compliance posture, please contact the Jackson Lewis attorney with whom you regularly work.