IN THIS ISSUE

COURTS & LITIGATION

Federal Judge Questions Undefined “Illegal DEI” Restrictions in Emergency-Funding Case

• ‘Illegal’ DEI Remains Undefined at Hearing Over Emergency Funds

 

OVERVIEW

At a November 17 hearing in the Northern District of Illinois, U.S. District Judge Manish Shah repeatedly pressed the Department of Justice to define what the Trump administration considers “illegal” DEI programming—a certification now required for certain federal emergency-response grants. DOJ counsel was unable to provide a definition, stating only that grant recipients “can’t operate programs that are illegal DEI,” without identifying what conduct the government views as violating the condition.

 

The lawsuit was filed by a coalition of municipalities—including Chicago, New York, Baltimore, and Ramsey County, Minnesota—arguing that the administration’s requirement is unconstitutionally vague and imposes ideological restrictions unrelated to the statutory purpose of emergency funds. Attorneys for the cities emphasized that the government has never articulated what actions or policies would qualify as “illegal” DEI, leaving recipients unable to determine how to comply.

 

Judge Shah’s exchange closely mirrored a hearing earlier this year before U.S. District Judge Matthew Kennelly, who granted a preliminary injunction in a separate case after DOJ lawyers were likewise unable to define the term. These cases arise alongside other recent challenges to the administration’s attempts to freeze or condition federal grants based on compliance with broader ideological goals; courts have previously blocked similar efforts involving sanctuary jurisdictions and certain HUD funding conditions.

 

LEGAL INTERPRETATION

The lawsuit was filed by a coalition of municipalities challenging the Trump administration’s decision to condition federal emergency-response funding on a certification that recipients do not operate “illegal DEI” programs. The cities argue that the government has never defined what “illegal DEI” means, making the condition unconstitutionally vague and unenforceable. Under federal spending law, conditions attached to grants must be clear, specific, and related to the statutory purpose of the funding program — a standard the plaintiffs say this requirement fails to meet.

 

The vagueness concerns were underscored in court when U.S. District Judge Manish Shah pressed DOJ attorneys for examples of what the condition prohibits. Shah asked whether a city’s HR manual stating that employees cannot be fired for being transgender — or a state prison providing gender-identity-related care — would violate the executive order. DOJ attorneys were unable to answer either question, reinforcing the plaintiffs’ claim that cities have no meaningful way to determine whether routine nondiscrimination or inclusion practices could jeopardize essential federal funding.

 

A related case earlier this year resulted in a preliminary injunction after another federal judge concluded the administration also could not define “illegal DEI.” Together, these cases highlight growing judicial skepticism toward federal grant conditions that rely on ambiguous ideological standards rather than clear statutory guidance.

 

BRIDGE POV
The hearing in Chicago highlights a growing pattern where federal agencies are attaching conditions to funding without defining the terms institutions must comply with. “Illegal DEI” is the clearest example yet. When cities cannot get an answer about whether basic nondiscrimination policies or standard HR protections fall under this category, the issue is not DEI — it is the erosion of clarity that organizations rely on to operate responsibly.

 

This is where leaders must stay anchored in law, not shifting labels. Title VII and related civil rights statutes have not changed. What was legal last year is legal this year; what was prohibited last year remains prohibited today. The misinterpretation or rebranding of DEI work does not alter the underlying legal framework. DEI programs tied to compliance, equal opportunity, workforce safety, or nondiscrimination remain lawful, necessary, and aligned with longstanding obligations.

 

The instability comes from undefined federal conditions, not from the work itself. Institutions should continue grounding their policies in established law, documenting rationales, and providing clarity to employees and stakeholders even when federal signals conflict. The courts are beginning to identify these overreaches, but organizations cannot rely on litigation alone. Stability comes from staying rooted in principle and values — and in the law that has guided workplace equity for decades.

 

ACTIONABLE STRATEGIES

1. Ground Policies in Established Civil Rights Law: Review nondiscrimination, HR, and inclusion practices to ensure they are explicitly tied to Title VII, equal employment obligations, and long-standing civil rights protections. Make the legal foundation visible in policy language so teams can operate confidently even when federal terminology is in flux.
    
2. Document Rationale and Decision-Making for Key DEI Practices: Maintain clear records showing how workplace programs, training, and protections advance compliance, safety, and operational integrity. Documentation provides stability when external definitions shift and helps demonstrate that organizational practices remain lawful and necessary..
    
3. Prepare for Ambiguous or Shifting Federal Requirements: Create an internal protocol for quickly assessing new funding conditions that use undefined or politically influenced terms. Ensure legal, HR, compliance, and finance teams can rapidly evaluate risks, request clarification when needed, and maintain continuity of essential services without reacting to unclear directives.

FEDERAL FUNDING & OVERSIGHT

Judge Blocks Trump-Era ‘Pay-to-Stay-Funded’ Settlement, Shields the University of California System From Funding Conditionality

• Trump can’t withhold funds or demand UC payment, judge rules
• US federal judge blocks broader funding threats to University of California system

 

OVERVIEW

As previously reported in Issues 25 and 31, a coalition of UC labor unions and faculty associations filed suit in September 2025 challenging the Trump Administration’s suspension of federal research and student-aid funding to UCLA. The funding freeze followed federal civil rights findings related to antisemitism on campus, and plaintiffs argued that the administration’s subsequent $1.2 billion settlement demand unlawfully used grant suspension to pressure the university system into broad policy concessions.

 

On November 14, 2025, U.S. District Judge Rita F. Lin, a federal judge in the Northern District of California, issued a preliminary injunction blocking the administration from enforcing the proposed settlement and from applying a broader “task force” policy that threatened the entire UC system with future funding withdrawals. Judge Lin found that conditioning the restoration of previously awarded research grants on a large financial settlement and sweeping policy changes likely violated constitutional and administrative safeguards.

 

The ruling preserves prior orders restoring more than $500 million in UCLA research funding and extends protection across all UC campuses. It also significantly restricts the administration’s ability to use retroactive financial penalties or policy demands as conditions for reinstating federal research funds already awarded under law.

 

LEGAL INTERPRETATION

Judge Rita F. Lin’s injunction underscores the legal limits on how the federal government may use funding suspensions and settlement demands to influence university policy. Under longstanding Spending Clause doctrine, federal funds may be conditioned only when requirements are clearly stated, related to the purpose of the funding, and not coercive. The court found that requiring a $1.2 billion payment to restore already-awarded research grants was likely coercive and exceeded the executive branch’s authority to impose retroactive conditions.

 

The ruling also reflects First Amendment and due-process concerns. Plaintiffs argued that the administration’s “task force” policy and settlement terms sought to compel changes to campus speech and governance through the threat of massive financial loss. Judge Lin determined that using withdrawn funding as leverage for unrelated policy concessions raised substantial constitutional questions and undermined procedural protections that apply to federal grant administration.

 

While the litigation continues, the injunction prevents the government from enforcing the proposed settlement or applying similar conditionality across the UC system. More broadly, the decision signals judicial scrutiny of attempts to tie federal research funding to large financial settlements or sweeping policy commitments that extend beyond the statutory framework governing federal grants.

 

BRIDGE POV
The court’s ruling is a reminder that federal funding cannot be used as a bargaining tool to force institutions into compliance with political priorities. For the UC system, this injunction is not simply a legal win — it safeguards academic governance from unprecedented financial pressure and affirms the boundaries of lawful federal oversight.

 

The broader signal for leaders is clear: when enforcement actions shift from due process to leverage, institutional stability is at risk. The attempt to tie a billion-dollar settlement to the reinstatement of awarded grants highlights how quickly financial mechanisms can be weaponized in volatile political environments. Protecting mission-critical research, campus governance, and the integrity of academic inquiry now requires a higher level of vigilance and internal coordination.

 

In this environment, organizations cannot rely on assumptions about the neutrality of federal processes. They must be prepared to demonstrate compliance, protect institutional autonomy, and respond decisively when funding becomes a pressure point rather than a partnership.

 

ACTIONABLE STRATEGIES

1. Strengthen Documentation and Procedural Readiness: Ensure all major research, compliance, and civil rights processes are thoroughly documented and reviewable. Clear records of corrective action, governance structures, and reporting protocols reduce vulnerability when federal scrutiny is escalated or leveraged.
    
2. Prepare Governance and Risk Teams for Funding Volatility: Conduct scenario planning focused on grant suspensions, conditional settlements, and federal enforcement shifts. Align legal, research, finance, and academic leadership around rapid-response plans that protect research continuity and avoid operational disruption.
    
3. Safeguard Academic Autonomy Through Proactive Communication: Reinforce internally and externally where your institution stands on lawful governance, academic freedom, and nondiscrimination. Transparent, values-driven communication helps maintain trust with stakeholders and protects against attempts to impose policy changes through financial pressure.

 

See also: DOJ Finds UCLA And GWU Liable For Failing To Address Antisemitism (Issue #25); UC Unions Sue Trump Administration Over “Financial Coercion” (Issue #31)

FEDERAL FUNDING & OVERSIGHT

USDA Keyword Purge Targets “Diversity” and “Climate” Grants

• USDA searched for terms like 'diversity,' 'climate modeling' to target grants for cancellation

 

OVERVIEW
In early 2025, internal USDA directives instructed program officers to identify and revise grants containing terms linked to diversity, equity, inclusion, environmental justice, or climate-related priorities. A subsequent communication expanded the review to climate-specific terminology such as “climate modeling,” “climate-smart agriculture,” and “carbon pricing.” Universities and nonprofit partners reported delays in FY2026 funding cycles as Notices of Funding Opportunity were re-cleared to align with recent executive orders restricting the use of DEI- and climate-related language across federal programs.

 

According to information cited by the Department of Government Efficiency, USDA ultimately terminated roughly 600 grants valued at more than $3 billion. These awards included funding for climate-resilient agriculture, soil conservation, community food systems, and programs serving socially disadvantaged and underserved producers. USDA has not released public guidance detailing the scope of the directives, leaving institutions uncertain about how many grants were canceled, revised, or subjected to new restrictions.

 

On June 5, 2025, three USDA grantees—Agroecology Commons, Oakville Bluegrass Collective, and the Urban Sustainability Directors Network—filed suit in the U.S. District Court for the District of Columbia. Represented by Earthjustice, FarmSTAND, and the Farmers Justice Center, the plaintiffs allege that USDA, acting under direction from the Department of Government Efficiency, adopted a “policy, pattern, and practice” of unlawfully terminating multi-year federal grant awards without notice, explanation, or opportunity for review. The complaint argues that these actions improperly substituted political directives for statutory program requirements, violating administrative and constitutional safeguards.

 

LEGAL INTERPRETATION

USDA’s keyword-based review and subsequent termination of hundreds of obligated grants raises significant administrative-law concerns. Federal agencies may revise the language in future funding opportunities, but they must follow established procedures when suspending, modifying, or canceling active, multi-year awards. Terminating grants based primarily on the presence of certain terms—rather than statutory criteria, program performance, or individual review—invites questions under the Administrative Procedure Act’s requirements for reasoned decision-making and prohibition on arbitrary agency action.

 

The legality of these actions is now the subject of a federal lawsuit brought by Agroecology Commons, Oakville Bluegrass Collective, and the Urban Sustainability Directors Network. The plaintiffs argue that USDA, acting at the direction of the Department of Government Efficiency, adopted a “policy, pattern, and practice” of unlawfully canceling grants without notice or an opportunity to respond. The complaint asserts violations of the Administrative Procedure Act, due-process protections, and constitutional limits on executive authority over federal spending. Plaintiffs further contend that retroactively imposing new language-based conditions on obligated funds exceeds the executive branch’s discretion under the Spending Clause.

 

Because the litigation directly challenges one of the largest sweep-based terminations in recent federal grant practice, the outcome could establish clearer limits on how agencies implement executive orders, the procedures required before canceling obligated awards, and the legal boundaries governing political directives in federal grant administration.

BRIDGE POV
The USDA’s keyword-driven sweep underscores how quickly essential programs can be destabilized when political priorities override statutory mandates. Many of the terminated grants supported small farms, community-based food systems, climate resilience efforts, and historically underserved producers—groups that rely on multi-year funding to maintain operations and plan for future seasons. When agencies shift from program objectives to language policing, the risk extends beyond grant recipients to the communities and regional economies that depend on these resources.

 

For leaders across agriculture, research, and rural development, this is a moment to reinforce clarity of mission. The work of soil conservation, climate adaptation, and equitable food systems cannot be governed by fluctuating terminology or political pressure. Institutions must be prepared to demonstrate compliance with law while remaining grounded in evidence-based practices that serve local needs. Institutional trust—and the continuity of essential work—depends on it.

ACTIONABLE STRATEGIES

1. Protect Program Continuity Through Clear Internal Framing:  Maintain mission-aligned descriptions of climate, conservation, and equity priorities internally, even as federal language shifts. Anchoring work to statutory requirements and on-the-ground needs helps teams stay focused amid political volatility.
    
2. Strengthen Compliance and Documentation Across All USDA-Funded Projects:  Review active and upcoming grants for potential exposure to terminology-based restrictions. Maintain robust documentation of project performance, eligibility, and milestones to reduce vulnerability if awards face additional scrutiny or suspension.
    
3. Build Contingency Plans for Funding Delays and Local Impact:  Prepare for disruptions across FY2026 cycles by identifying alternative funding partners—state agencies, philanthropy, and regional networks. This ensures continuity for producers, community organizations, and food-system programs if federal processes become unpredictable.

COURTS & LITIGATION

State and Federal Crackdown on Proxy Advisors Draws Lawsuit from Faith-Based Investors

• 'Monstrously broad': Faith-based groups sue Ken Paxton over Texas investment law

 

OVERVIEW

Following the 2025 proxy season—where anti-DEI shareholder proposals were rejected by 97–99% of investors at major companies including Apple, Costco, Goldman Sachs, Disney, Visa, and Levi Strauss—state and federal officials have intensified scrutiny of the proxy advisory industry. ISS and Glass Lewis, which guide approximately 97% of the proxy-advisory market, had recommended voting against these proposals across the season, and institutional investors largely followed their guidance. As first reported in Issue 23, state officials began examining whether proxy advisors were advancing “non-financial” considerations, while federal officials signaled interest in new restrictions that could reshape how proxy advice is produced and relied upon.

 

Texas has now advanced the most sweeping state-level measure. Senate Bill 2337 restricts proxy advisory firms from issuing voting recommendations that incorporate environmental, social, governance, or other values-based considerations unless they provide detailed financial justification, and it authorizes enforcement by the state attorney general. The law applies to any advisor offering services to Texas-based investors and carries penalties for recommendations deemed insufficiently tied to financial metrics.

 

On November 12, 2025, a coalition of faith-based investors—including the Interfaith Center on Corporate Responsibility and United Church Funds—joined by Ceres, filed suit in federal court challenging SB 2337. The complaint argues that the law violates the First Amendment by restricting proxy advisors’ speech and interferes with religious and mission-driven investors’ ability to vote their shares in alignment with their fiduciary and ethical commitments. The case marks a significant test of how far states may go in regulating proxy advice amid escalating political efforts to curb ESG-aligned voting practices.

 

LEGAL INTERPRETATION

The lawsuit brought by the Interfaith Center on Corporate Responsibility, United Church Funds, and Ceres challenges whether states may restrict proxy advisors’ voting recommendations based on viewpoint or values alignment. Plaintiffs argue that Texas’s Senate Bill 2337 imposes content- and viewpoint-based limits on proxy advisors’ speech by requiring detailed financial justification whenever recommendations incorporate environmental, social, governance, or other non-financial considerations. Under longstanding First Amendment principles, such restrictions are subject to heightened scrutiny, especially where they regulate professional or commercial speech tied to research, analysis, and expert judgment.

 

The case also raises questions about investors’ ability to exercise their fiduciary responsibilities. Proxy advisors provide research and recommendations that many institutional and mission-driven investors rely on to vote shares in a manner consistent with financial risk assessment, ethical commitments, or religious stewardship. Plaintiffs argue that SB 2337 effectively constrains this process by discouraging or penalizing recommendations tied to long-horizon risks—including climate, workforce, and governance issues—and thereby interferes with investors’ ability to carry out their established fiduciary practices.

 

More broadly, the challenge highlights tension between state anti-ESG statutes and federal frameworks that govern proxy voting, including the SEC’s authority over proxy advisory firms and the established role of investor judgment in corporate governance. The outcome of this case may clarify whether states can impose additional barriers on proxy advisory firms in ways that narrow the analytical tools available to institutional investors or chill the use of ESG-related criteria in shareholder voting.

 

BRIDGE POV
The coordinated push to regulate proxy advisors marks a new phase in the politicization of corporate governance. What began with anti-DEI proposals failing almost unanimously in the 2025 proxy season has now escalated into legislative and regulatory efforts aimed at the core infrastructure investors rely on to exercise their rights. When state laws restrict the research investors can receive, and federal policymakers signal similar scrutiny, it threatens the independence of the proxy system itself.

 

For faith-based and mission-aligned investors, the stakes are particularly high. Their investment stewardship depends on the ability to weigh long-term risk, ethical responsibility, and values-driven governance. Restrictions that narrow the scope of proxy research don’t just alter process — they limit the ability of investors to fulfill fiduciary duties grounded in mission, morality, or long-horizon risk. The lawsuit brings this tension into sharp focus: whether shareholder democracy can be shaped by political pressure or must remain grounded in informed, independent judgment.

 

This is not just about compliance, it is a signal of how governance expectations are being redrawn. As proxy systems face competing political demands, companies will need clarity, consistency, and transparent engagement with investors navigating a rapidly shifting landscape.

 

ACTIONABLE STRATEGIES

1. Strengthen Alignment Between Corporate Values, DEI Priorities, and Investor Engagement: Clarify how your organization’s values, DEI commitments, and business strategy reinforce each other, and communicate that alignment directly to investors. As proxy advisors face political constraints, companies need to ensure investors still understand how inclusion, workforce stability, and long-term risk management inform governance decisions and support sustainable performance.
    
2. Document Governance Rationales for Key Votes and Policies: As states seek to police the content of proxy advice, companies should ensure that major governance decisions — from human-capital oversight to climate risk management — are thoroughly documented. This gives investors a transparent basis for understanding board decisions, regardless of shifts in proxy-advisory frameworks.
    
3. Prepare for Divergent State and Federal Voting Environments: Anti-ESG statutes are creating fragmented conditions for investors across jurisdictions. Companies should expect varying voting norms and rationale disclosures depending on investor location and should build internal capacity to respond consistently. Maintaining clear, stable governance policies will help navigate a landscape where investor tools and constraints may differ significantly by state.

 

See Also: Glass Lewis Challenges Texas Law Requiring Disclosures On DEI And ESG Advice (Issue 23)