A federal district court has delivered a significant ruling that limits the government’s ability to claw back awarded grant funding based on shifting agency priorities.
The U.S. District Court for the District of Massachusetts granted summary judgment on July 17 in favour of multiple states and the District of Columbia in a challenge against the administration.
At the heart of the case was the administration’s use of the Termination Clause under 2 C.F.R. § 200.340 to cancel billions of dollars in federal grant funding after those awards had already been made.
The Termination Clause, as modified in 2024, states that a “Federal award may be terminated in part or in its entirety… if an award no longer effectuates the program goals or agency priorities.”
Agencies had relied on this provision to cancel existing grants after determining that funded activities no longer aligned with priorities that, in some cases, directly departed from the original programme goals.
The plaintiffs argued the government could not invoke the Termination Clause to cancel grants based solely on newly adopted agency priorities that were not disclosed at the time of the original award.
The court sided with the plaintiffs, finding that the broader regulatory scheme of 2 C.F.R. § 200 did not permit terminations grounded in priorities adopted after an award had been made.
The court also found the administration’s interpretation raised constitutional concerns under the Spending Clause, which requires conditions on federal funding provided to states to be “voluntarily” and “knowingly” accepted, citing Pennhurst State Sch. & Hosp. v. Halderman, 451 U.S. 1, 17 (1981).
Crucially, the ruling does not reinstate any federal grant funds that have already been terminated, nor does it prevent agencies from changing programme goals for future prospective grants.
What the decision does do is restrict the administration’s ability to cancel existing grant awards based solely on new agency priorities adopted after those awards were originally made.
Federal grant recipients should review their existing award terms and ensure they continue to comply with current objectives in light of the ruling and ongoing litigation developments.
Awardees are also advised to monitor related agency guidance, including the Office of Management and Budget’s recently proposed revisions to the federal grant regulations, which could further shape the landscape.
The case underscores the legal limits on executive agencies when they attempt to redirect previously committed public funds by redefining their own priorities after the fact.