Chris Allen

Welcome to the fifth season of State AG Pulse. In this season, we’ll be digging into the weekly state AG news to bring you our insights on the impact of state attorneys general across a broad range of industry sectors. From technology to healthcare and telecommunications to consumer financial services, state attorneys general continue to wield extraordinary influence, not only in their own states, but also on the national stage. Now, on to this week’s episode.

Chris Allen 

Hello everyone and welcome to season five of State AG Pulse. My name is Chris Allen. I’m a partner in Cozen O’Connor’s State Attorneys General Practice and I cannot believe that we are back for another season. Thank you for tuning in. This season we’re going to take a trip back to a format we got great reception for a few seasons ago and we’re going to take a deep dive each recording, each podcast, into one specific story involving state attorneys general, what they’re doing in policy, politics and the law, and how that influences and impacts the business community. We hope to continue to provide the great insight and analysis our listeners have come to expect. Thank you for joining us today. Right now, I’m very excited to be joined by my partner in the State AG practice, Ann-Marie Luciano. Welcome back, Ann-Marie.

Ann-Marie Luciano

Thanks, Chris. Happy to be here.

Chris Allen
And Ann-Marie and I are very, very excited to be joined by our vice chair of Cozen O’Connor’s Labor and Employment Department, Mike Schmidt. Mike, you have your own incredible podcast, The Employment Law Now, and I highly recommend that to everyone listening. So we are very grateful you’ve taken the time to come join us today.

Mike Schmidt

I appreciate the invitation and certainly the plug for the podcast as well.

Chris Allen

What’s cross marketing between colleagues, right? And today we are looking at an issue that I think without exaggeration is on literally everyone’s minds. Diversity, equity, inclusion, and I sometimes hear access put in there, DEI. Specifically, we’re going to talk about how the business community should be thinking about those issues in light of the dramatic shifts really in the last several years and especially in the last two months and I can’t believe it’s only been two months. Ann-Marie, about, not that anybody really needs the highlights, but how about you tell us what’s been going on in this area recently?

Ann-Marie Luciano 

There has been a lot of activity starting out with the Trump administration’s issuance of two executive orders, one to end what’s called radical and wasteful government DEI programs and preferencing and one to end what they call illegal discrimination and restore merit-based opportunity. Both of these EOs have been challenged in court and I’ll turn it over to Mike to talk to us about the latest and greatest on the status of those two EOs.

Mike Schmidt

Sure, thanks Ann-Marie happy to table set. You know this was certainly one of the issues that President Trump campaigned on, this issue of DEI and promised that he would take this up in the form of Executive Orders right after he took office and that he did. The first two days right after Inauguration Day, on January 20th and January 21st, as you said, he issued two separate Executive Orders targeting DEI policies and programs that may be used not only by government agencies and government contractors and educational institutions; but also the private sector [is] not immune to this as well. As you mentioned, two Executive Orders for those who are keeping score at home it’s Executive Order 14151 and Executive Order 14173. The real 30,000-foot takeaway from these Executive Orders

Mike Schmidt

is that those who are entering into contracts or grants they are required to agree that they are in compliance with all applicable federal anti-discrimination laws as being material to the decision by the government to issue payments and what’s really making news here is that the recipient or the contracting party has to certify that it does not operate any programs promoting DEI that would violate applicable federal anti-discrimination laws. In other words they have to certify that they’re not engaging in illegal DEI. As you’d also expect, litigation came very quickly and on February 21st the federal judge in Maryland entered a nationwide injunction, prohibited the enforcement of virtually all components of President Trump’s DEI Executive Orders although there were some aspects of it that were allowed to continue including the Department of Justice being able to continue investigations to identify what were deemed to be the most egregious and discriminatory practitioners out there and also create a strategy for combating so-called illegal DEI. So many of us saw that injunction, the nationwide injunction February 21st and thought that would be the end of it for a while, until last week. On March 14th, the Fourth Circuit Court of Appeals three-judge panel essentially rejected that injunction, saying that the Executive Orders were not likely unconstitutional on their face because they merely direct certain agency action to come from those Executive Orders. And therefore, we need to see how those agencies are going to actually implement the Executive Orders before we can figure out if that agency action is done,  constitutionally. So as of last week, March 14th, the Executive Orders are sort of back in play together with the certification requirements and some of the risks attendant to these Executive Orders. And we can get into that in a little bit more detail. But that’s essentially where we are as of right this moment.

Chris Allen

So Mike, with respect to the certification requirements, if the order, if the Fourth Circuit now stayed the judge’s order, but that’s pending the agencies actually acting pursuant to the Executive Order, are those certification requirements in effect or are we waiting for the agencies to provide guidance?

Mike Schmidt

Hot off the presses just on March 19th, we’ve got some guidance, however informal and however non-binding at the moment it may be. The EEOC, the federal agency enforcing Title VII and the United States Department of Justice came out with some joint guidance. Jointly they issued a one-pager which is entitled “What to Do If You Experience Discrimination Related to DEI at Work”. And it doesn’t do much other than talk about really what Title VII already says in the way of, these are the ways that you can violate Title VII, here are the numbers you can call if you feel aggrieved. What is a little more substantive in some sense is the EEOC putting out a series of 11 FAQs on this issue. It doesn’t really give any specific examples, even a non-exhaustive list. And at its core, it essentially just restates sort of the somewhat truism that DEI is illegal if it violates Title VII. That’s essentially what it says. So I want to take a minute or two just to go through what it literally says. And what’s interesting, so there are 11 questions here in the FAQs. And what’s interesting is that the 11 questions start off not by going into DEI and not hitting the ground running with this connection between DEI and Title VII, but they start off the first couple of questions with, hey, can I file a lawsuit in federal court without taking any other steps? If I believe I’m being discriminated against related to DEI, what federal agency can help me? So the first few questions are very much a plug for the EEOC’s services as well as reminding aggrieved individuals that if they are aggrieved, they can go ahead and file external complaints. As you get into questions 4 and 5 and 6, talks a little bit about coverage and particularly what we’ve now come to understand are reverse discrimination claims where individuals who are typically considered to be not in minority groups are bringing claims that they are discriminated against due to some DEI-related initiative or activity. And the FAQ #4 confirms that Title VII applies equally to all workers. They don’t apply simply to individuals who are part of, say, a racial or an ethnic minority, or even those that might be considered historically underrepresented groups. Title VII applies equally to all workers, therefore the EEOC is giving some legs again to potential reverse discrimination claims. The EEOC’s FAQs also make mention of the fact that it’s not just employees as a group who are protected from DEI-related discrimination, noting that Title VII protects applicants, training and apprenticeship program participants, as well as perhaps [to] interns. So it’s not just employees. It also makes clear in FAQ #6 that it’s not just employers who are covered entities under Title VII when it comes to DEI-related claims. It is, of course, employers with 15 or more employees, but as the EEOC points out, the law also applies to employment agencies, including staffing agencies, other entities that operate training programs, labor organizations, like unions, for example. And the FAQ also notes that employers can be liable for the actions of their agents, which could include recruiting or staffing agencies in some circumstances.

Mike Schmidt 

We finally talk about DEI-related issues when we get to question 7 of the 11 FAQs in this new EEOC guidance. And the question is, when is a DEI initiative, policy, program, or practice unlawful under Title VII? The EEOC is reminding folks in question 7 that if you have a DEI initiative, policy, or program, or practice, that leads to an employment-related decision being made that is motivated in whole or in part by race, sex, or another protected characteristic, that’s when the DEI practice will become illegal. If it is not motivating an employment-related decision, then the DEI policy or practice will not be illegal. The EEOC says in its guidance, “Employers also should ensure that employees of all backgrounds have equal access to workplace networks.” So I think the takeaway on this point is that resource groups, affinity groups, are not per se illegal as long as you are not limiting membership to those groups by protected characteristic, as long as you are not imposing barriers to membership or opportunities in those particular groups to people of a particular protected characteristic. Lastly, the last three questions here, questions 9, 10, and 11 are also interesting. Not that they make new law or that they suggest anything new, but that the EEOC is reaffirming a few points. First of all, question 9, asking whether an employer can justify taking employment action based on race, sex, or other protected characteristics if the employer deems it to be in that entity’s business interest or in the interest of a customer or a client? And the EEOC has come out and reminded us that no, Title VII can still be violated if the employment action is motivated by an impermissible basis. So client or customer preference, according to the EEOC, is not going to be a defense to a discrimination case.

Mike Schmidt 

Finally, the EEOC talks about DEI training because that’s another issue that has come up. In addition to initiatives and policies, what about employers who are providing discrimination, harassment training that includes DEI mentions? The EEOC has now reminded us in their FAQs that Title VII prohibits workplace harassment. And depending on the particular facts, and depending on the particular training, an employee may be able to show that diversity or other DEI-related training created a hostile work environment in its content, in its application, or in its context. The FAQs have not given us any kind of real examples of what it means and acknowledges that this is going to be looked at on a case-by-case basis. At the end of the day, all it is really saying is DEI is illegal if it’s illegal. In other words, if it violates already existing Title VII principles, that’s when DEI is going to be illegal. So as I’m going to get to in a few minutes when we talk about takeaways and what organizations should be thinking about moving forward, does this new guidance really change any of that? Not really. But what it does do is it reinforces that the EEOC is looking at this, is going to continue to be active with this, and organizations should give at least some thought as to whether their programs and the language that they’re using to describe their programs and initiatives would otherwise violate already existing principles under Title VII.

Chris Allen

Mike, that was a great and very thorough summary. We really appreciate you putting that together.

Mike Schmidt 

I think the takeaway is, and what the EEOC I think is trying to say here, is that Title VII has not changed. Title VII prohibits employment-related actions that are motivated by protected characteristics, impermissible protected characteristics. And DEI policies and initiatives that violate already existing Title VII is going to be what EEOC deems to be illegal.

Ann-Marie Luciano

Mike, you also pointed out that they talk about and seem to solicit calls and questions relating to how to file a claim or seek advice with the EEOC. How would you advise companies on how they can mitigate against employees viewing and complaining that their DEI programs are unlawful?

Mike Schmidt

Well, you know, certainly like any other employment issue, think organizations would be wise to have internal complaint procedures and avenues internally where employees can feel comfortable going to an internally designated department or a particular individual if they feel as if they’ve been discriminated against for any reason, including DEI-related issues. The more that organizations understand that these issues are out there and the more that organizations give employees the ability to raise concerns internally, the more likely it is, not that you’ll eliminate all kinds of external complaints, but you might have a chance of minimizing the number of occasions where individuals feel that they have no other recourse but to file a lawsuit or but to go to an agency like the EEOC.

Chris Allen 

Anne Marie, what impact is this having on the states and at the state level and how are state AGs weighing in on this issue?

Ann-Marie Luciano 

Well, just like the federal activity, it’s been certainly a fire hose of activity on the state level. And to add further confusion, there’s a disconnect between how some of the state AGs, of course, interpret what is unlawful DEI and what is lawful DEI in their states. So on the one hand, we have 16 Democratic AGs who recently issued a guidance document. And this guidance document addresses the Trump Executive Orders directly. These AGs, they take the position that the Executive Orders do not make DEI policies and practices unlawful overall, and that they only reaffirm existing law. And the Democratic AGs view existing law only prohibits, as Mike was saying, unlawful quotas, racial discrimination or preferences. So the AGs argue that the EOs, to the extent they intend to go broader than that, are unlawful. And the AGs say that in their states, DEI is not only lawful, but if a company were to remove their DEI policies or not have a DEI policy or program, that may be a factor, these AGs say, in their consideration of enforcement action. Or it could be a factor in consideration of future exposure and liability. It puts companies in a little bit of a pickle, in particular companies that are across multiple jurisdictions and may have conflicting state and federal obligations. These AGs, they have a lot of practical advice for businesses in their letter about how a business may go about lawfully designing a DEI program regarding recruitment, retention, affinity groups. So they provide recommendations on a practical level about how they believe that would be lawful in their jurisdictions, but it remains to be seen, of course, how that would shake up compared to the federal requirements.

Mike Schmidt

Yeah, and you know, the problem here, I think, is the uncertainty that’s being caused and what the ramification of that. I’ve actually heard the word chaos be used. it’s not about whether we agree or disagree on DEI programs, whether they’re good, whether they’re not, whether some, you know, are over-broad or not. That’s really not the issue. The issue is, I think what we’re seeing because of this uncertainty and with the litigation, we’ve seen a lot of companies from financial institutions to law firms taking aggressive action to try to not be a target of what seems to be aggressive federal action right now, trying to interpret a term that we don’t have any guidance on. And the question is, are companies going too far the other extreme so that they’re not going to be a target, certainly until we do get more guidance on this.

Ann-Marie Luciano

Yeah, and on the state level, we have had a couple of states who have since brought lawsuits against businesses for violating state and federal law in their view. So we had Missouri to Starbucks arguing that Starbucks’ DEI policies violated both state human rights law and Title VII. The Missouri AG alleges that Starbucks’ policies constituted unlawful discrimination. And then we have an interesting similar case where the Florida attorney general a couple of weeks ago brought an action against Target, arguing that Target’s DEI practices and its maintenance of ESG, what’s known as environmental, social, and governance policies for investments, that those policies violated the SEC Act because allegedly Target did not properly inform its shareholders and investors about the potential ramifications of maintaining those policies. So another interesting way that AGs can use their broad powers to go after and pursue enforcement action against businesses that they believe are violating federal or state law.

Mike Schmidt

In addition to just the general uncertainty, we’re talking about state attorneys general. So you can have obviously a multi-jurisdictional organization that’s operating in a blue state, operating also in a red state. And what is it to do when you are having attorneys general take perhaps conflicting positions on this issue for the same organization?

Chris Allen

Yeah. And on top of that, Mike, what Ann-Marie and I see all the time is just how creative state AGs can be. And I think that Target case is very interesting because the hook, as you said, Ann-Marie, it’s not Title VII. It’s not the Florida Human Rights Act. It’s the SEC Act. And I think the AGs, at least in my conversations with Republican AGs and staff, I don’t think I’m disclosing any confidences to say that after the Harvard vs. Students for Fair Admissions decision, they have been thinking about different ways to use the principles behind that, maybe not the actual laws involved, but the principles behind that in other areas and in other fields, and it just shows the creativity they have. You’re using the SEC Act. Mike, I’m sure when we talk about the certifications these companies have to do, that implicates laws like the False Claims Act. 

Mike Schmidt

Exactly. As you know it’s a real issue for organizations who are being required to certify, make certain affirmative statements, that they are complying with federal DEI discrimination laws and not engaging in illegal DEI activity without really knowing and without having any guidance on what constitutes legal DEI.

Chris Allen

Yeah, and Ann-Marie, it’s not just the federal FCA, right? You’ve got 30 states out there with their own False Claims Acts.

Ann-Marie Luciano 

You have states with their own False Claims Acts and to add another layer of complication, you have some states that have requirements specific either to state contractors. So for example, if you have a university that maybe receives both state and federal funding, they may have a state requirement that requires them either to have an affirmative action plan or to post demographic data. And that may conflict of course with their federal requirements.

And then you have other jurisdictions, for example, Illinois passed a statute that requires nonprofits to post demographic data. The Department of Justice under [US]AG Bondi just intervened in that litigation to argue that those requirements about providing demographic data conflict with federal law. So it’ll be interesting to see how this plays out on these multiple different federal and state levels.

Chris Allen

So what do we tell people? mean, I have clients that are asking me about this and I, first of all, the developments are happening fast and furious. Like you said, Mike, the 4th Circuit’s ruling only came a couple of days ago. And I think uncertainty is a word that we’ve all used several times in this conversation. What do we tell our clients? What should people be thinking about?

Mike Schmidt

Well, I the easy answer is, as I also say on my podcast, you know, we probably should be doing these podcast episodes every 20 minutes every day because these things are changing and information gets stale, it seems by the hour. But, from my perspective, look, I think organizations would be wise to at a minimum examine their EEO and DEI programs and initiatives, particularly the language that’s being used and how their programs are structured, including language that’s used in an outward-facing manner to minimize the risk that the organization might be a target at this point. We want to also determine a plan to establish some good faith, reasonable efforts to comply with the Executive Order requirements so that you can perhaps maximize your ability to rely on certain defenses to a False Claims Act claim, including the Scienter requirements and some of the other elements that have to be proven for a False Claims Act claim. So what type of efforts can you show, can you document that would minimize the risk of a False Claims Act claim? As Ann-Marie also said, you want to be mindful of state law, affirmative action requirements on the state level, but state law anti-discrimination obligations as well and coming full circle, you want to just keep your eyes and ears open because this is all pretty fluid.

Ann-Marie Luciano

Yeah, and I’ll add one footnote to that as well. We’re starting to see with some of our clients who have this conflict with receiving both state and federal money and they have a conflicting state reporting requirement, some states offer a waiver process. So that’s something also to consider in the states where you may do business, whether there’s a waiver for the conflicting state DEI or affirmative action requirements.

Chris Allen

Sorry, Ann-Marie, so you could go to the agency you’re contracting with or visit the AG’s office and say, I can’t comply with both.

Ann-Marie Luciano 

Yeah, so in some states it would be the agency from which you receive the grant or the contract to see if you can get a waiver from whatever the particular requirement may be, whether it’s an annual reporting requirement or a certification requirement. In other situations, you may reach out to the AG to see whether or not you can get a waiver so that you don’t have this situation where you risk either losing federal money or state money or potentially exposing yourself to criminal liability for following your state and federal obligations.

Chris Allen

I think I mentioned before this has been an issue that at least on the Republican side and I think on the Democrat side too, the AGs have been talking about for a long time. I was joking with somebody when these two EOs came down, I won’t say who it was, but I said, hey, it’s going to open up so much new bandwidth for you because the Trump administration is going to take the lead on all this stuff. And they looked and they were like, nah, I think there’s still going to be some room for us. And I think that’s something this conversation has really brought out is the states are here too. The AGs that are taking the position that this violates their laws, they’re not going to take their foot off the gas because they are theor own sovereigns, they have their own interests, they’re gonna keep pushing on this because they think is the right thing to do.

Ann-Marie Luciano

Yeah. And we even saw that play out a little bit after the Harvard decision, where we saw Republican AGs issuing letters warning universities that they may take action against them for maintaining DEI, unlawful DEI. And we saw Democratic AGs like the Colorado AG issue guidance explaining what that AG viewed to be lawful DEI. So this has played out before. Now I just think it’s more heightened as a result of the additional direct guidance from the Trump administration.

Mike Schmidt 

There’s no question about that. There’s definitely a heightened sensitivity. I think, look, at the end of the day, I still think that everybody can agree that reducing barriers to opportunities is something that everybody believes is okay. And I think that even the Trump administration believes that much is okay. So this is just a great opportunity until we do get further guidance, it’s a great opportunity for organizations to just relook at the language they use, relook at their programs and initiatives, to try to make sure that that’s really the mission and the goal that they’re accomplishing. it’s not to suggest that they can’t have this notion of inclusivity within their organization but it’s a great time to just make sure that you’re maximizing the compliance with how the Executive Orders are currently written and applied.

Chris Allen

Absolutely. I would have one last thing to that. And again, this just comes from Ann-Marie and I and our relationships with AG, as you know, we talk to them every single day, them and their senior staff. And I do think you’re right, Mike, you’re absolutely right. There’s an interest everybody shares in reducing barriers. And so my advice, and I know this is always uncomfortable advice, but I give it every time is, if a company really thinks that what it’s doing is in that interest, they should not be afraid to engage with the AGs. They’re not, the great thing about AG offices is they’re not like federal bureaucracies that tend to be, you know, kind of nameless and faceless. Sorry to my friends who work in the federal bureaucracy. AGs and their staff welcome companies to come in there and establish dialogue with them. And so, you know, a company might not want to raise its hand or stick its head up, but at the same time, there are ways to engage with AGs. You can attend meetings or AG events. You can visit the AG or the state in which you’re located and just open a dialogue, make sure they understand that you’re coming from a place of trying to provide opportunity, to reduce these barriers that you’re talking about, Mike, and you would be shocked at what you can accomplish by doing that, by opening that relationship and that dialogue versus waiting for a CID or a lawsuit to fall on your desk.

Mike Schmidt

Yeah, I agree completely with that.

Chris Allen

I think this has been great. I actually learned a lot from this podcast, so I appreciate it, Mike and Ann-Marie. Any parting thoughts before we go?

Ann-Marie Luciano

try to follow the news by the hour, as we would say.

Mike Schmidt

Yeah, let’s get back on this in 15 minutes, is the other takeaway. But I appreciate you having me on. This is certainly an important issue and one that’s impacting lots of people, lots of organizations. So I appreciate the discussion.

Chris Allen

And of course, Mike, I know you’re going to be talking about these issues on your great podcast, Employment Law, Now in a lot more depth. So anybody who hasn’t quite gotten enough of Mike’s excellent summary here, we advise you to go take a listen to the next episode where he’s probably going to be talking about that in much more detail.

Mike Schmidt

Thanks Chris, I appreciate it.

Chris Allen

You have been listening to State AG Pulse brought to you by Cozen O’Connor’s State AG Group and the State AG Report. Please leave us a five star rating and of course tune in again in two weeks for our next episode. Thank you so much for joining us.