Alex Hontos

In an important decision for recipients of federal funding, a federal court held that federal agencies may not terminate previously awarded grants merely because a new administration adopts new program goals or policy priorities, declaring unlawful a key authority for the federal government’s recent mass grant terminations. Background Twenty states, three governors, and the District of Columbia brought an action against an array of federal agencies asserting a pre-enforcement Administrative Procedure Act (“APA”) challenge to the administration’s interpretation of the government’s grant-termination authority under the Uniform Guidance, specifically 2 C.F.R. § 200.340(a)(4) (the “Termination Clause”), which provides: The Federal award may be terminated in part or its entirety as follows: . . . The Federal agency or pass-through entity pursuant to the terms and conditions of the Federal award, including, to the extent authorized by law, if an award no longer effectuates the program goals or agency priorities.1 In so doing, the plaintiffs challenged the key provision, found in many federal grants and cooperative agreements, that the Administration has relied upon to terminate billions of dollars of agreements over the last year-and-a-half. Notably, the plaintiffs did not seek reinstatement of grants previously terminated under this authority (perhaps an acknowledgment of the legal headwinds related to the Court of Federal Claims’ jurisdiction over such actions). In their challenge, plaintiffs argued the Termination Clause was not, in effect, a termination for convenience, as the federal government could not redefine the “program goals or agency priorities” for a grant mid-performance. The Court's Decision On July 17, 2026, the U.S. District Court for the District of Massachusetts ruled in favor of the plaintiffs, holding that “the Termination Clause does not permit agencies to terminate grants based on program goals and agency priorities identified after grants were awarded.” In reaching its holding, the court relied on the text and structure of the broader regulatory scheme, which the court found requires agencies to establish clear program goals, disclose funding priorities, and communicate performance expectations before issuing an award. The court also relied on OMB's explanation accompanying its rulemaking for the Termination Clause. The court reasoned that allowing an agency to replace those priorities after the award would undermine the Uniform Guidance’s notice requirements. The court also found that the government’s interpretation raised concerns under the Spending Clause. Under Pennhurst State School & Hospital v. Halderman,2 conditions attached to federal funding to States must be sufficiently clear to allow a recipient to make an informed decision whether to accept the funds. According to the court, a grantee cannot knowingly accept a funding condition if the agency may later change the goals against which the award will be measured. Significantly, the ruling does not prevent agencies from changing their priorities for future funding opportunities. Nor does it prohibit termination for noncompliance or on other grounds authorized by the award terms, statute, or regulation. Rather, it limits agencies’ ability to terminate an otherwise compliant award solely because the agency adopted different “program goals or agency priorities” after making the award—this of course was the basis for most of the billions of dollars in research and climate grants terminated by the Trump Administration over the past 18 months. What This Means for Federal Grant Recipients If the decision withstands appeal, one of the key tools used by federal agencies to terminate previously awarded grants will be unavailable as a basis to terminate future grants—at least for now (more on that below). The court granted the plaintiffs’ motion for summary judgment on their declaratory judgment claim confirming future terminations of grants relying on a change in agency priorities since the award decision, will be suspect and subject to attack as violating the court’s order—indeed, the declaration in the court’s decision arguably protects all parties and non-parties from such a fate. And while the decision does not directly affect the rights of grant recipients and subrecipients who already had grants terminated under the Termination Clause, as the court declined to reinstate any terminated grants, it may be useful to those recipients if they challenge terminated grants as having been unlawful in separate litigation under the Tucker Act in the Court of Federal Claims. And because the relief is awarded under the APA, the Supreme Court’s decision in Trump v. CASA proscribing so-called universal injunctions may mean that the decision has wider impact. Institutions should carefully preserve and review the notice of funding opportunity, assistance listing, award terms, approved scope of work, stated program goals, performance measures, and agency communications. Those documents may help establish the priorities governing the award when it was made and whether a later termination rests on noncompliance, an authorized award condition, or a newly adopted policy position. The court’s order may be appealed, and institutions should continue to monitor further developments. Although the decision provides important guidance under the current Uniform Guidance, institutions should continue to monitor OMB's proposed revisions to the grant termination provisions. If adopted, those revisions could expand agencies' authority to terminate federal awards and change the regulatory framework that formed the basis for the court's decision, potentially limiting its application to grants awarded under the revised regulations. In the meantime, the opinion provides important support for colleges and universities administering federal grants by limiting agencies' ability to terminate existing awards based solely on policy priorities adopted after the awards were made. 1 The plaintiffs also challenged an earlier version of the regulation, which had omitted the clause “pursuant to the terms and conditions of the Federal Award[.]" See 2 C.F.R. § 200.340(a)(4) (2021). 2 451 U.S. 1 (1981).

In a significant, if not predictable, development the Trump Administration proposed changes to federal regulations governing federal assistance—changes that if adopted would significantly impact most recipients of federal assistance awards. Both traditional recipients of assistance awards like universities and non-traditional funding recipients scaling domestic manufacturing, mining, and tech, should take note as the landscape continues to shift.  On May 29, 2026, the Office of Management and Budget ("OMB"), together with federal grant-making agencies, published a notice of proposed rulemaking (“NPRM”) to overhaul the Uniform Guidance, the regulations that typically govern federal grants and cooperative agreements. OMB provides the proposed rule is designed to “improve transparency, accountability, and oversight for Federal awards across the Federal Government” in addition to preventing waste or misuse of funds, accountability and “ensur[ing] that basic American principles of equality and equal opportunity are upheld throughout all stages of the award making process and that unlawful discrimination is no longer permitted.” The proposed Uniform Guidance overhaul includes several notable revisions, including: Expanded Political Involvement and Pre-Award Review Consistent with Executive Order 14332, the proposed rule provides that senior presidential appointees will conduct “a pre-issuance review of all discretionary awards” in accordance with the following principles: “Discretionary awards must, where applicable, demonstrably advance the President’s policy priorities.” “Discretionary awards must not be used to fund, promote, encourage, subsidize, or facilitate: (i) racial preferences or other forms of racial discrimination by the recipient, including activities where race or intentional proxies for race will be used as selection criterion for employment or program participation; (ii) denial by the recipient of the sex binary in humans or the notion that sex is a chosen or mutable characteristic; (iii) illegal immigration; or (iv) any other initiatives that compromise public safety or promote anti-American values.” Preference for “institutions with lower indirect cost rates.” Granting awards to “a broad range of recipients.” The applicant’s commitment to “complying with administration policies, procedures, and guidance respecting Gold Standard Science.” The institution’s “commitment to rigorous, reproducible scholarship over its historical reputation or perceived prestige.” Restrictions on Certain Foreign Collaborations The NPRM prohibits recipients and subrecipients from using federal funds to support a bilateral or multilateral “collaboration, agreement, program, or activity” with covered foreign countries and foreign entities. “Covered foreign country” means a foreign adversary, a country of particular concern, or a country subject to sanctions or restrictions relating to national security, defense or intelligence activities. “Covered foreign entity” includes entities owned or controlled by covered foreign countries, an “entity of particular concern,” or entities “affiliated with military, intelligence, or security services of a covered foreign country.” The prohibition applies broadly to direct programmatic activities, research, technical assistance, travel, and allocable indirect costs. The proposed rule incorporates and expands the “Wolf Amendment”—a NASA-specific limitation on the use of grant funds for bilateral collaboration with China—to all Federal awards. Elimination of Fixed Amount Awards and Subawards OMB proposes eliminating fixed amount awards and subawards. According to the NPRM, fixed-amount awards “can limit transparency and hinder effective oversight” because recipients generally are not subject to routine monitoring of actual costs and are not always required to submit financial reports. If finalized, fixed amount grant recipients and subrecipients will need to transition from results-oriented reporting to a cost-reimbursement model with expanded financial reporting obligations. Broader Agency Authority to Suspend or Terminate Awards The NPRM expands agencies’ ability to terminate or suspend awards to include terminations for convenience, providing grantmaking agencies “may terminate a Federal award in part or its entirety if the Federal agency or pass-through entity determines that a termination is in the interest of the Federal agency or pass-through entity . . . .” Notably, the NPRM carves out terminations for convenience if “inclusion of such a discretionary termination would conflict with a Federal statute,” including block grants, awards based on statutory formula, or disaster recovery grants. The NPRM provides for opportunities to object and lodge appeals for remedies for noncompliance, including noncompliance-based terminations, but not terminations for convenience. Speech-related Restrictions The NPRM prohibits the use of Federal financial assistance “to promote or support theories that impose disparate-impact liability based on federally protected characteristics such as race, sex, or age” consistent with Executive Order 14281, “Restoring Equality of Opportunity and Meritocracy.” OMB expressly excepts internal activities unfunded by Federal awards and unconnected to “activities under the Federal award.” The NPRM also prohibits public recipients or subrecipients (and non-public recipients and subrecipients to the extent “relevant activities” are funded by a Federal award1) from “discriminat[ing] on the basis of viewpoint, content, or subject matter of speech—including on the basis of political, ideological, or religious affiliation or perspective—in providing services for events, meetings, or other expressive activities.” OMB provides its intent is to “prevent public entities from using Federal funds—including indirect costs used for buildings and facilities—in a discriminatory manner.” Specifically, the provision is designed to prevent public colleges and universities from charging additional fees (such as “heckler’s fees”) “to provide security for conservative speakers.” Additionally, federal funds may not be used to fund, promote, encourage, subsidize, or facilitate DEI or DEIA, “gender ideology,” or the “so-called ‘transition’ of a child under 19 years of age from one sex to another[.]” Key Takeaways Expect uncertainty (and perhaps more delay) in federal awards as agencies attempt to sync their award processes with the stated, and unstated, presidential priorities.  The revised pre-issuance review may slow the award of grants and extend the time between application and award.  Monitor the changes closely to track how the NPRM could impact collaborations with China and other foreign entities.  Grantee compliance systems may need to change to address the proposed restrictions and broadened authority to terminate grants.  Comments on the proposed rule are due by July 13, 2026. Litigation is expected as these proposed changes are implemented. Dorsey will continue to monitor developments and provide updates as the rulemaking process proceeds. 1 The government contends that applying the prohibition to non-public recipients “does not present constitutional concerns under the First Amendment, provided that the Federal agency does not seek to leverage funding to regulate speech outside the contours of the Federal program” and cites to Agency for Int'l Dev. v. All. for Open Soc'y Int'l, Inc., 570 U.S. 205 (2013). The government’s contention will almost certainly be tested in the courts.