As this blog’s readers know, DEI as a topic has proven to be a high priority under the new Trump administration. The administration’s approach to DEI is important not only for domestic U.S. companies, but also for multinational companies with U.S. subsidiaries. In the following guest post, Burkhard Fassbach examines the DEI-related issues for multinational companies. Burkhard is a D&O lawyer in private practice in Germany. I would like to thank Burkhard for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Burkhard’s article.
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Introduction
Multinational companies with subsidiaries in the US should review their insurance programs to adequately cover diversity, equity, and inclusion (DEI) related litigation risks in the US. The Executive Orders (EOs) directing federal agencies to eliminate DEI initiatives and scrutinize private employer practices have raised concerns over potential risks for directors and officers (D&O) and employment practices liability (EPL), according to an article in the Insurance Business Magazine. While the EOs have drawn attention to DEI programs, much of the legal activity surrounding them stems from the US Supreme Court’s 2023 decision striking down affirmative action. The landmark case “Students for Fair Admissions v. Harvard, 600 U.S. 181 (2023)” ruled that race-based affirmative action programs in most college admissions violate the Equal Protection Clause of the Fourteenth Amendment. The ruling was subsequently used as a legal argument against corporate DEI programs. The heightened focus on DEI creates additional considerations for corporate directors and officers. Carriers writing D&O and EPL coverage are preparing for a potentially more litigious environment. The article in the Insurance Business Magazine can be found here.
Executive Orders (EOs) and Department of Justice (DOJ) MEMORANDUM
On January 20, 2025, the Administration issued EO 14151, which directs federal agencies, employees, grant recipients, and contractors to “terminate to the maximum extent allowed by law” any equity-related grants or contracts and DEI-related performance requirements. EO 14151 can be found here.
On January 21, 2025 the Administration issued EO 14173, which prohibits federal agencies from engaging in or promoting DEI-related practices, and requires heads of federal agencies to generate reports identifying “the most egregious DEI practitioners” in each “sector of concern” within the agency’s jurisdiction. This EO also requires each agency to develop a plan to deter DEI at private-sector companies. EO 14173 can be found here.
On February 5, 2025 the Office of the Attorney General issued a MEMORANDUM encouraging the private sector to end illegal discrimination and preferences, including policies relating to DEI and stated that to fulfill the Nation’s promise of equality for all Americans, the Department of Justice’s Civil Rights Division will investigate, eliminate, and penalize illegal DEI and DEIA preferences, mandates, policies, programs, and activities in the private sector that receive federal funds. The MEMORANDUM can be found here.
EEOC Litigation
The Office of General Counsel (OGC) conducts litigation on behalf of the U.S. Equal Employment Opportunity Commission (EEOC) to obtain relief for victims of employment discrimination and to ensure compliance with the statutes that the EEOC is charged with enforcing. The EEOC has the authority to sue nongovernmental employers for violations of Title VII of the Civil Rights Act of 1964. The EEOC and the Justice Department warn against unlawful DEI-related discrimination. Reference is made to a Press Release dated March 19, 2025, which can be found here.
Under Title VII of the Civil Rights Act of 1964, DEI policies, programs, or practices may be unlawful. The EEOC investigates charges of discrimination and can file a lawsuit under Title VII against businesses and other private sector employers. Title VII prohibits employment discrimination based on protected characteristics such as race and sex. Different treatment based on race, sex, or another protected characteristic can be unlawful discrimination, no matter which employees are harmed. Title VII’s protections apply equally to all racial, ethnic, and national origin groups, as well as both sexes. In addition to unlawfully using quotas or otherwise “balancing” a workforce by race, sex, or other protected traits, DEI-related discrimination in the workplace might include the following: Disparate Treatment – Limiting, Segregating, and Classifying – Harassment – Retaliation. Title VII protects employees, potential and actual applicants, interns, and training program participants.
The key takeaway from the EEOC and DOJ guidance is that not all forms of DEI are considered by the administration to be “illegal” under Title VII, according to a publication by the law firm Morgan, Lewis & Bockius LLP. The lawyers point out that it is useful to remember that, while these documents provide helpful clarity, they are not legally binding. EEOC and DOJ guidance represents the considered views of those agencies on the legal obligations created by Title VII and the case law interpreting it: they do not override prior court decisions. Given the persistent uncertainty in this area, employers should continue to monitor developments closely and ensure their programs are compliant with the law. The worth reading Morgan Lewis publication can be found here.
A Supreme Court “Reverse Discrimination” Case is expected to further clarify what’s to come for “Illegal DEI”. The Supreme Court heard arguments on February 25, in the case of Marlean Ames, a straight woman from Ohio who alleged discrimination on the basis of her sexual orientation under Title VII of the Civil Rights Act after her employer allegedly denied her a promotion, while promoting a purportedly lesser qualified gay coworker, and also demoted her, again replacing her with a purportedly lesser qualified gay coworker. According to a Freshfields Blog Post it can be assumed that if the Supreme Court rules as expected, employees in all circuits will be permitted to plead reverse discrimination in the same manner as all other employment discrimination claims, which may lead to an increase in the number of such claims. And even though Ames involves discrimination on the basis of sex and sexual orientation, its decision will likely apply to reverse discrimination claims brought on the basis of race, color, religion, and national origin. The insightful Freshfields Blog Post can be found here.
False Claims Act as an Anti-DEI enforcement tool
Executive Order 14173 focused on DEI programs links compliance with federal anti-discrimination laws to the federal False Claims Act (“FCA”). The FCA is a powerful anti-fraud tool through which the government can investigate or take action against parties that receive federal funds. It is designed to incentivize parties with information about a potential fraud to bring this information to the government and allows private citizens to bring such suits and receive potentially significant financial rewards. According to an article in the Harvard Law School Forum on Corporate Governance the EO 14173 expressly contemplates that the FCA will be used as an enforcement tool with respect to the government’s anti-DEI efforts. It specifies that the head of each agency must include in every contract or grant award terms that require the contractor or grantee to (i) “agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decision” for purposes of the FCA, and (ii) “certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.” The term “material” to payment is the same term used in the FCA, 31 U.S.C. § 3729 (a)(1)(B). The article can be found here.
The FCA imposes potentially significant damages and penalties. This includes potential treble damages for FCA violations, which allows the government to seek a damages figure of up to three times the amount of the government’s loss. The government often starts by asserting that its loss is equal to the total contract value – then multiply by three. Reference is made to an Insight headlined “DEI Executive Order Implies Threat of FCA Litigation” by the law firm Orrick, Herrington & Sutcliffe LLP. The lawyers point out that the government may even begin investigations by issuing Civil Investigative Demands (“CIDs”) to companies targeted by such allegations. Potentially related, the memo issued on February 5 from the Attorney General instructs the Department of Justice’s (“DOJ”) Civil Rights Division to make efforts to “investigate, eliminate, and penalize illegal DEI” programs. The memo calls for “proposals for criminal investigations and … potential civil investigations,” as well as “[a]dditional potential litigation activities.” The worth reading Orrick Insight can be found here.
DEI executive order compliance checklist
According to a DEI executive order compliance checklist published by the law firm Hogan Lovells, companies should conduct a privileged audit of diversity related employment policies and programs to ensure compliance with anti-discrimination laws, including hiring, promotion, training, mentoring, and compensation/bonus programs. Complaints of discrimination on the basis of any protected characteristic should be investigated promptly. External communications concerning DEI should be reviewed for accuracy and potential litigation risk. Companies should assess the risk that existing DEI disclosures and governance policies could give rise to administrative or legal action under executive orders or subject the company to stockholder lawsuits. Enforcement trends and pronouncements from US enforcement authorities and regulators related to DEI programs should be monitored. It is recommended to ensure compliance with whistleblower protections and internal investigations processes if employees or others raise concerns about DEI-related practices. The DEI checklist also includes added considerations for government contractors according to which it is advisable to update internal federal contract-related policies and procedures as needed based on results of review, including wind-down of race- and sex-based affirmative action programs. The very valuable Hogan Lovells DEI compliance checklist can be found here.
State Attorneys General (state AGs)
State AGs are now emerging as major players against DEI. Reference is made to a Freshfields Blog Post. On February 11, 2025, the State of Missouri filed a lawsuit against the Starbucks Corporation, alleging that the coffee chain used DEI policies to discriminate against employees based on race and sex, in violation of federal and state laws. Missouri, represented by Attorney General Andrew Bailey, claims that by using discriminatory race and sex-based practices in hiring, firing, and advancing employees, Starbucks hired less qualified employees, leading to slower service and higher prices for Missouri’s consumers. The lawsuit makes good on the threat by state AGs to bring actions against companies with progressive DEI programs. The lawsuit zeros in with allegations that Starbucks sets specific racial and sex-based quotas, including for members of the board, and ties executive compensation to achieving these diversity goals. The instructive Freshfields Blog Post can be found here.
DEI Governance Carve-Outs
Multinational corporations have been retreating, at least in part, from their DEI initiatives in the US since the Executive Orders were issued. Here are three illustrative examples of US subsidiaries majority owned by German multinational companies:
Discount supermarket chain Aldi in the U.S. appears to have “retreated” without an official announcement from DEI. A significant indicator is the quiet removal of all references to Diversity, Equity, and Inclusion from its US careers website in late January 2025. This was first reported by HR Brew, a respected human resources industry publication. Their article on January 31, 2025, titled “Aldi US quietly removes DE&I language from its careers page,” points out that Aldi’s careers page previously highlighted employee inclusion groups, DEI education, and internships. While it’s unclear if Aldi has entirely dismantled its DEI efforts, the removal of this language suggests a shift in how the company publicly presents its commitment to these values in its hiring practices. It’s worth mentioning that Aldi Süd in Germany, the international parent company of Aldi US, still features information about its global Diversity and Inclusion Strategy on its corporate sustainability website. This highlights a potential divergence in approach between Aldi’s global stance and its US operations.
Institutional Shareholder Services (ISS), an American proxy advisory firm majority owned by Deutsche Börse Group, will no longer consider the gender and racial and/or ethnic diversity of a company’s board when making vote recommendations with respect to the election or re-election of directors at US companies,” the proxy adviser said in a statement on its website, which can be found here.
Another illustrative example of a “DEI governance carve-out” is T-Mobile US, Inc. Its majority shareholder is the German telecommunications company Deutsche Telekom. Here are excerpts from a letter from T-Mobile to the Chairman of the Federal Communications Commission (FCC) dated March 27, 2025: “… We recognize that the legal and policy landscape surrounding diversity, equity, and inclusion (“DEI”) under federal law has changed. The Supreme Court recently issued decisions that signal a shift in the Court’s approach to DEI, and President Trump subsequently issued two Executive Orders that center on ending illegal discrimination. More generally, DEI has become a politically charged topic because some interpret it as sanctioning preferential treatment of some Americans based on impermissible distinctions… We dissolved as planned our External Diversity & Inclusion Councils, which were created five years ago in partnership with civil rights organizations to advise the company on workforce recruitment, procurement, community investment, and corporate governance.” You can find the full letter here.
The reason for the letter from T-Mobile US, Inc. to the FCC was an announcement that the FCC is prepared to block mergers and acquisition proposals from companies that promote “invidious” DEI policies. Reference is made to a Bloomberg article published on March 21, 2025. The move could threaten billions of dollars worth of deals in the communications sector, with the FCC specifically mentioning Paramount Global’s merger with Skydance Media, Verizon Communications Inc.’s acquisition of Frontier Communications Parent Inc., and T-Mobile US Inc., which is seeking to purchase of US Cellular Corp.’s wireless operations and some of its spectrum assets. The Bloomberg article can be found here.
D&O and Employment Practices Liability (EPL) Insurance policies
Recommended are adequate D&O and Employment Practices Liability (EPL) Insurance policies. EPLI is a type of liability insurance that protects businesses against claims made by employees alleging various wrongful employment practices. It essentially covers the costs associated with lawsuits arising from workplace issues. EPL insurance typically provides coverage for legal defense costs (attorney fees, court costs) and potential damages (settlements, judgments) related to claims such as in particular Discrimination: Claims based on protected characteristics like race, sex, age, religion, disability, and other legally protected categories in hiring, firing, promotion, compensation, and other employment terms. Most EPL policies operate on a “claims-made” basis. This means the policy will only cover claims that are first made against the insured during the policy period, even if the alleged incident occurred in the past. Coverage can often be tailored to the specific needs and risks of a business. While EPL insurance provides financial protection, it’s crucial for businesses to implement strong HR practices, clear policies, and employee training to minimize the risk of employment-related claims. In summary, EPL insurance is a vital safeguard for businesses of all sizes, helping to protect them from the significant financial and reputational costs associated with employment-related lawsuits.