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What Happens When OMB is Sued Over its New Proposed Grant Rules?
A storm at _Pors-Loubous_ by Henri Camus
The Office of Management and Budget’s new proposed rules for the administration of federal grants have caused a storm.
Published on May 29 as the largest rewrite of federal grant rules since the Uniform Guidance was consolidated in 2013, the proposal drew tens of thousands of public comments before the July 13 deadline. We wrote in June about what the proposed rule would mean for scholarly publishing and open access specifically, and our post last week highlighted our comments to OMB on those issues.
This post steps back and addresses a more basic question: is any of this legal, and what happens when OMB is sued?
We anticipate that these regulations, if finalized in anything like their current form, will face many legal challenges. Some will likely challenge whether OMB has the power to issue rules like this at all. Others may accept that OMB has some general authority but argue that particular provisions exceed that authority. Whether and how soon we would get direct answers from the courts is unclear – for one, it’s not certain how plaintiffs would establish standing, and other now well-worn tactics (e.g., efforts to move cases to a more friendly court like the Court of Federal Claims). But assuming the courts do pass on the merits of these kinds of claims, the rationale behind these challenges lies in certain particulars of federal administrative law that few authors spend much time thinking about, but because litigation would likely have a significant impact on ongoing research, we thought a brief explanation of some of these issues would be helpful.
## **Does OMB have this authority in the first place?**
Presently, the OMB Uniform Guidance is just that—guidance for how other federal agencies will spend money on grants, cooperative agreements, and financial assistance, rather than a regulation binding grant-recipients directly. OMB suggests policies, but each agency has to implement them before they become legally binding. One thing the proposed rule does is consolidate power in OMB by stating that a new rule by OMB automatically becomes the rule for each of the agencies. So, when thinking about legal challenges, a good place to start is to ask whether OMB actually has the authority to dictate what rules other federal agencies impose on the grantees funded through their grant programs. This is a more complicated question than it may seem.
Agencies are creatures of statute; they have only the powers Congress gives them, and federal law requires agencies engaging in rulemaking to identify the statutory authority on which they rely. For this rulemaking, OMB points primarily to 31 U.S.C. § 503(a)(2), which directs OMB to “provide overall direction and leadership to the executive branch on financial management matters by establishing financial management policies and requirements,” along with a handful of related provisions, including 31 U.S.C. § 6307, which authorizes OMB to issue “supplementary interpretative guidelines” for grants and cooperative agreements.
Section 503 originated in the Chief Financial Officers Act of 1990, a statute aimed at fixing unreliable financial reporting and weak internal controls across the government. One would think that “financial management policies and requirements” in that context most naturally means things like accounting standards, audit procedures, and reporting systems, not substantive conditions on what grant-funded work may say or do. And “supplementary interpretative guidelines” in § 6307 is an odd phrase to hang binding, government-wide regulation on.
In fact, courts have recently had occasion to consider OMB’s authority in adjacent contexts, and the early results are not encouraging for OMB. In _National Council of Nonprofits v. OMB_, the plaintiffs challenged OMB’s January 2025 memo freezing nearly all federal financial assistance. The district court concluded that, to the extent OMB relies on § 503 for its authority to do so, that statute “strongly suggests that OMB occupies an oversight role” rather than one of direct command over agency spending decisions. A California district court quoted and followed that reading later in AFSCME v. OMB, No. 3:25-cv-08302 (N.D. Cal. Oct. 28, 2025). And in _Woonasquatucket River Watershed Council v. Department of Agriculture_, the District of Rhode Island enjoined an OMB-directed freeze of Inflation Reduction Act and infrastructure funds, finding that federal law did not authorize the “broad powers” OMB and the agencies asserted. Those cases are on appeal, but they show how courts are likely to approach the question: OMB coordinates and oversees; it does not, on its own authority, regulate grant recipients.
On top of this, the Supreme Court’s “major questions doctrine” means a rule of this scale will get an especially hard look. Under that doctrine, courts expect Congress to speak clearly before an agency may decide questions of vast economic and political significance. As the _National Council of Nonprofits_ court put it, “[w]hen an agency claims to discover in a long-extant statute an unheralded power to regulate ‘a significant portion of the American economy,'” courts “typically greet its announcement with a measure of skepticism.” _Util. Air Regul. Grp. v. EPA_ , 573 U.S. 302, 324 (2014) (quoting _FDA v. Brown & Williamson Tobacco Corp._, 529 U.S. 120, 159 (2000)). It is difficult to imagine a better candidate for that skepticism than a rule that converts decades-old “guidance” into binding regulation governing hundreds of billions of dollars in annual federal spending, on the strength of a 35-year-old statute no prior administration read to confer such power.
So will this question about OMB’s authority be the undoing of the proposed regulation? Here is where things get complicated, because the proposed rule isn’t coming just from OMB. The proposed rule is styled as a _joint_ rulemaking: roughly forty grantmaking agencies, from HHS to NSF to the Peace Corps, are simultaneously proposing conforming changes to their own regulations. So, should the rules be challenged, it seems easy enough to say “this isn’t just OMB speaking, but all of the agencies, jointly.”
But as one legal analysis points out, the proposal says essentially nothing about what authority those other agencies are invoking (which they are required to do under the Administrative Procedure Act). More importantly, the joint-rulemaking structure would only address the current rulemaking. The whole point of reclassifying the guidance as an OMB regulation is that _future_ amendments would take effect government-wide the moment OMB finalizes them, without any agency-by-agency adoption (though presumably, agencies would still coordinate under established review processes, e.g., under Executive Order 12866). To the extent that it is done so via authority granted by current agency heads, that raises all sorts of complicated questions about the extent to which they can delegate authority that Congress granted them to another executive branch official (in this case, OMB). The answers here are not clear.
## **Even with authority, the rule collides with other law**
Even if a court accepts that OMB (or the agencies collectively) can legally issue this type of regulation, agencies still can only regulate in ways that don’t conflict with other statutes passed by Congress (and, of course, the Constitution). There are quite a few ways the proposed rules may seriously run afoul of the First Amendment’s prohibition on inhibiting free expression. These would include pretty explicit calls for agencies to engage in viewpoint discrimination on issues related to racial diversity, gender, and sex.
Going into all the First Amendment issues probably deserves its own post, so for now I’ll focus on one rather straightforward statutory conflict: the proposed rule on indirect costs awarded to grantees, an issue that the current administration has already been sued on (and lost) and that Congress has specifically spoken to.
In 2024, Congress passed the following:
“In making Federal financial assistance, the provisions relating to indirect costs in part 75 of title 45, Code of Federal Regulations, including with respect to the approval of deviations from negotiated rates, shall continue to apply to the National Institutes of Health to the same extent and in the same manner as such provisions were applied in the third quarter of fiscal year 2017. None of the funds appropriated in this or prior Acts or otherwise made available to the Department of Health and Human Services or to any department or agency may be used to develop or implement a modified approach to such provisions, or to intentionally or substantially expand the fiscal effect of the approval of such deviations from negotiated rates beyond the proportional effect of such approvals in such quarter.
Further Consolidated Appropriations Act, 2024, Pub. L. No. 118-47,§ 224, 138 Stat. 460, 677.
In _Massachusetts v. NIH_, decided January 5, 2026, the First Circuit affirmed a permanent injunction against NIH’s attempt to impose a flat 15% cap on reimbursement of facilities and administrative costs (the “indirect costs” that support research infrastructure). The court held that the cap violated the text above, concluding that “Congress went to great lengths to ensure that NIH could not displace negotiated indirect cost reimbursement rates with a uniform rate,” as well as HHS’s own regulations governing deviations from negotiated rates.
The proposed rule goes to some lengths to assert that it is _not_ changing the indirect cost rate negotiation system, and states that it doesn’t want to hear comments on the subject. If that’s really true, at a minimum the proposed rules are ambiguous in some respects – e.g., where they propose major changes to what costs are allowed (such as subscriptions to academic journals) where those costs are ordinarily recouped through indirects. Lots of people (including ARL, AAU, and others) have expressed concern about this. We wrote about this question in June: the proposed revision to 2 C.F.R § 200.454, if applied to indirect costs would make subscriptions to “business, professional, academic, and technical periodicals” unallowable, which at major research universities runs to millions of dollars per year.
It would be odd to say that the government cannot change how indirect cost rates are calculated while allowing it to eliminate massive categories of the expenses that traditionally make up those rates. Congress directly responded to earlier attempts to slash indirect cost recovery. A court asked to review the subscription provision will have to decide whether accomplishing through the cost principles what Congress forbade through rate-setting is meaningfully different.
## **Conclusion**
OMB has announced that it plans to make its new proposed rules effective on October 1 (an incredibly aggressive timeline, leaving barely any time for revision). Whether that actually happens, and what form the final rules take, will determine what actual legal challenges will look like. The comment record now before OMB is overwhelmingly negative, and perhaps OMB will change course, though I doubt it given that OMB Director Russ Vought has publicly and strongly defended key provisions. Congress may, of course, intervene. And the closer the implementation of the rules gets to the upcoming appropriation cycle, the more likely it becomes that Congress may act using the Congressional Review Act (a tool that allows Congress to review and override agency action). But assuming there is litigation, it will likely take some time to produce any meaningful clarification for researchers and their institutions. So for now at least, it seems the best we can do is plan for more uncertainty.
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