Gordon Rees Scully Mansukhani’s Government Contracts practice highlights the key developments from the past month and their implications for federal contractors. The team tracks significant decisions, regulatory changes, and practical updates to help contractors stay compliant in a rapidly changing environment.
Tune in to The Essential GovCon Brief podcast on Spotify or YouTube for a discussion on the issues highlighted below.
Federal Court Declines to Block Executive Order Restricting Contractor DEI Practices
On October 14, 2026, the U.S. District Court for the District of Maryland denied a preliminary injunction against Executive Order 14398 (Order), Addressing DEI Discrimination by Federal Contractors, leaving the administration’s restrictions on certain diversity, equity, and inclusion (DEI) activities in effect. National Association of Diversity Officers in Higher Education v. Trump, No. 26-cv-1532-ABA (D. Md. Oct. 14, 2026).
Signed March 26, 2026 (91 Fed. Reg. 16147), the Order requires agencies to include contractual provisions prohibiting contractors from engaging in “racially discriminatory DEI activities” in connection with federal contract performance. The Federal Acquisition Regulatory Council (FAR Council) issued implementing guidance on April 17, 2026, directing agencies to insert the new clause at Federal Acquisition Regulation (FAR) 52.222-90 (APR 2026) (Deviation APR 2026) beginning April 24, 2026, and to modify existing contracts by July 24, 2026. The clause flows down to subcontracts and lower-tier subcontracts and requires contractors to report certain subcontractor conduct. Violations may result in cancellation, termination, or suspension and ineligibility for future contracts. The clause also expressly identifies compliance as material to the government’s payment decisions, potentially supporting False Claims Act (FCA) enforcement. The Order separately directs the attorney general to consider FCA actions involving violations.
Contractor and higher education associations challenged the Order and the FAR Council memorandum on constitutional grounds. The court denied preliminary relief, concluding that the plaintiffs had not demonstrated a likelihood of success on their First and Fifth Amendment claims. Because “disparate treatment” carries an established meaning under federal antidiscrimination law—intentional discrimination based on race or ethnicity—the court concluded that the Order prohibits conduct already barred by federal law and is not facially overbroad or impermissibly vague. The court also declined to stay the FAR Council memorandum because the plaintiffs had not established independent irreparable harm, without resolving their remaining Administrative Procedure Act claims.
Importantly, the court interpreted the Order narrowly. It does not prohibit all DEI-related activities: Research, training, or discussions concerning race, ethnicity, or diversity do not necessarily constitute unlawful disparate treatment. The court emphasized the Order’s focus on discriminatory conduct connected with federal contract performance, rather than treating DEI-related speech or activities as categorically prohibited. The court further recognized that contractors subjected to enforcement based on a broader interpretation may pursue as-applied constitutional challenges.
Contractor Takeaway: The Executive Order’s requirements remain in effect while litigation continues, but the decision establishes important limits on their interpretation. Contractors should review their DEI policies and practices involving hiring, subcontracting, and program participation for compliance with federal antidiscrimination laws. Contractors should also understand the new clause’s information-sharing, reporting, and FCA materiality provisions, given the potential for contract remedies and FCA exposure. Importantly, the Order does not impose a blanket prohibition on lawful DEI activities.
DoW Issues New AI Procurement Guidance Addressing Ideological Neutrality and Transparency
On October 20, 2026, the Department of War (DoW) issued a memorandum titled Guidance on Implementing Unbiased Artificial Intelligence Principles in Procurements, establishing guidance for incorporating new artificial intelligence (AI) requirements into DoW solicitations and contracts. The memorandum implements Executive Order 14319, Preventing Woke AI in the Federal Government (July 23, 2025; 90 Fed. Reg. 35389), and Office of Management and Budget (OMB) Memorandum M-26-04, Increasing Public Trust in Artificial Intelligence Through Unbiased AI Principles (Dec. 11, 2025), which require federal agencies to procure large language models (LLMs) consistent with the principles of “truth-seeking” and “ideological neutrality.”
The guidance provides model solicitation and contract language designed to ensure that AI systems acquired by DoW comply with these principles. It directs requiring activities to identify the type of AI being acquired and provides corresponding solicitation instructions and contract compliance requirements.
For LLM procurements, the guidance identifies four minimum transparency requirements: (1) the model developer’s acceptable use policy; (2) the most current model, system, or data card; (3) documentation describing resources available to end users; and (4) a mechanism for reporting model outputs that may violate the unbiased AI principles. These requirements may also apply to other AI products. Depending on the nature and risk of the procurement, agencies may require additional disclosures concerning system prompts, content moderation, bias testing, training conducted outside the United States, and modifications made to accommodate foreign government requirements.
The memorandum also provides model contract language establishing ongoing compliance obligations. Under that language, contractors would be required to maintain compliance throughout contract performance and provide updated documentation following significant modifications to AI systems, including changes to training data, model architecture, or content filtering. The model language also provides that, when a contracting officer issues written notice of an output potentially inconsistent with the unbiased AI principles, the contractor must investigate and respond within 15 business days, addressing the findings, potential causes, corrective actions, and implementation timeline. The model language treats compliance as a material contractual requirement and requires flowdown to subcontracts at any tier involving the acquisition, development, or integration of LLMs.
Although the Executive Order and OMB guidance establish mandatory acquisition policy for covered federal agencies, DoW components may tailor the memorandum’s model language to individual procurements. The guidance primarily concerns AI systems acquired by the government, rather than contractors’ incidental use of AI tools for internal administrative purposes.
Contractor Takeaway: Contractors developing, supplying, or integrating AI systems for DoW should review their models, acceptable use policies, and technical documentation for compliance with the new requirements. Prime contractors and subcontractors relying on third-party LLMs should also ensure they can obtain the necessary documentation, respond promptly to compliance inquiries, and satisfy applicable flowdown obligations. Failure to comply with these requirements could result in significant contractual consequences.
Court of Federal Claims Recognizes Jurisdiction Over Other Transaction Protests and Sustains Challenge to Navy Evaluation
In two decisions issued October 29 and 30, 2026, the U.S. Court of Federal Claims addressed both its jurisdiction over protests involving Other Transaction (OT) agreements and the standards governing agency evaluations in those competitions. In Blue Water Autonomy, Inc. v. United States, Nos. 26-936, 26-944, the court held that it had jurisdiction over challenges to a Navy prototype OT competition, then sustained one protest and denied another.
The protests arose from the Navy’s competition for prototype Medium Unmanned Surface Vessels (MUSVs) under 10 U.S.C. § 4022. The Navy eliminated Blue Water Autonomy and Saildrone during the initial evaluation, preventing them from advancing to negotiations for prototype OT agreements and potentially receiving follow-on production awards.
In its October 29 decision, the court rejected the government’s argument that OT competitions fall categorically outside its protest jurisdiction. The court concluded that jurisdiction under 28 U.S.C. § 1491(b)(1) encompassed this OT competition because it was conducted in connection with an actual or proposed federal procurement. Because the Navy’s competition provided a direct pathway to follow-on production contracts, the requisite connection existed. Notably, the court declined to follow Telesto Group, LLC v. United States, 176 Fed. Cl. 711 (2025), which had taken a narrower approach to jurisdiction over prototype OT competitions, creating an “effective jurisdictional blackout” that could leave disappointed offerors without a forum until prototyping concluded.
In a separate merits decision issued under seal on October 30 and reissued for publication on November 3, the court sustained Saildrone’s protest. The Navy rejected Saildrone’s design because its reported displacement figures exceeded the stated maximum yet advanced another offeror whose proposal contained comparable discrepancies or omitted the relevant information altogether. The court found that the Navy had arbitrarily held Saildrone to a higher standard and rejected the government’s justifications as unsupported by the contemporaneous evaluation record.
Blue Water fared differently. The court upheld the Navy’s finding that its proposed test vessel was insufficiently representative of its production vessel because of significant differences in hull design and propulsion systems. The court deferred to the Navy’s technical judgment and also applied the Blue & Gold Fleet waiver doctrine, holding that Blue Water could not challenge a purportedly ambiguous solicitation requirement after failing to raise the issue before proposals were due.
As relief, the court set aside the Navy’s evaluation of Saildrone and ordered a reevaluation within 60 days under the same approach applied to successful offerors. If found acceptable, Saildrone must be reinstated to the competition. The court also temporarily prohibited the Navy from making additional MUSV production obligations that would cause aggregate obligations to exceed $1.5 billion of the $2.1 billion appropriated—a restriction extending to obligations under other solicitations, authorities, agreements, or transactions—until seven days after the reevaluation decision is communicated to Saildrone. Existing awards were left undisturbed.
Contractor Takeaway: These decisions provide significant support for bid protests involving OT competitions, particularly where prototype agreements are connected to follow-on production procurements. Although OTs are generally exempt from the FAR and Competition in Contracting Act (CICA), the decisions demonstrate that, where judicial review is available, agencies must conduct reasonable evaluations, apply announced criteria consistently, and adequately document their decisions. Familiar protest principles, including deference to technical judgments and waiver of untimely solicitation challenges, may also apply. Because jurisdiction remains unsettled among Court of Federal Claims judges, contractors should assess potential protest grounds and filing deadlines promptly, particularly where the OT competition provides a pathway to follow-on production awards.
GRSM Government Contracts Practice
GRSM’s Government Contracts team supports contractors throughout the entire procurement lifecycle, providing both proactive counseling and representation in disputes.
The team’s attorneys advise on compliance, small business programs, cost and pricing requirements, cybersecurity, subcontracting, and other regulatory issues, while also litigating bid protests, claims, and agency matters nationwide.
Please contact Patrick Burns or Meredith Thielbahr with any questions or for additional information.