Labor & Employment Law Daily Wrap Up, REMEDIES, DAMAGES—D.R.I.: Trump’s categorical federal funding freeze preliminarily enjoined, (Mar 7, 2025)

By Kathleen Kapusta, J.D.

“The Executive’s categorical freeze of appropriated and obligated funds fundamentally undermines the distinct constitutional roles of each branch of our government.”

Granting a preliminary injunction requested by 22 states and the District of Columbia in their suit against President Trump and the heads of numerous federal executive departments and agencies regarding the President’s directive to temporarily freeze all disbursement of federal funds, a federal court in Rhode Island explained that consistent with the Constitution, statutes, and caselaw, “the Executive’s discretion to impose its own policy preferences on appropriated funds can be exercised only if it is authorized by the congressionally approved appropriations statutes.” And in “imposing a categorical mandate on the spending of congressionally appropriated and obligated funds without regard to Congress’s authority to control spending,” the court stated, “the Executive put itself above Congress” (State of New York v. Trump, No. 25-cv-39-JJM-PAS (D.R.I. Mar. 6, 2025)).

OMB Directive. During his first few days in office, President Trump issued a series of Executive Orders directing federal agencies to pause and review funding in connection with his policy priorities, including a directive to identify and end DEI programs and federal funding of gender ideology. In late January, the Office of Management and Budget issued Memorandum M-25-13 (OMB Directive) instructing federal agencies to “complete a comprehensive analysis of all of their Federal financial assistance programs to identify programs, projects, and activities that may be implicated by any of the President’s executive orders.”

Agencies were also instructed to “temporarily pause all activities related to obligation or disbursement of all Federal financial assistance” and to submit by February 10 “detailed information on any program, projects, or activities subject to this pause.”

Lawsuit. In late January, the states sued the President and the agency and department heads arguing that their actions to implement the OMB Directive violated the Administrative Procedure Act (APA) and the Separation of Powers, among other things. They moved for a TRO but prior to the hearing, the OMB rescinded the Directive. Nonetheless, the court proceeded with the hearing during which the plaintiffs presented a statement from the White House Press Secretary explaining that the federal freezing fund was not rescinded and that the EOs remained in full force and effect. Finding that the Directive’s rescission was in name only, the court issued the TRO.

Several days later, asserting that their access to federal funds was still being denied, the states filed an emergency motion to enforce the TRO. Granting the motion, the court ordered the defendants to end any federal funding pauses. The defendants then appealed to the First Circuit, which denied their motion for an administrative stay.

Mootness. Responding to the states’ request for a preliminary injunction, the defendants argued that the recission of the OMB Directive rendered their claims moot. Disagreeing, the court, again citing the White House Press Secretary’s statement that the OMB memo was rescinded to “end any confusion created by the court’s injunction,” found the rescission “was a clear effort to moot legal challenges to the federal funding freeze announced in the OMB Directive.” Further, said the court, the states were challenging the funding freeze that was implemented not only by the Directive, but also the EOs incorporated therein and other agency actions such as the OMB’s issuance of the Unleashing Guidance, which directed agencies to immediately pause certain disbursement of funds appropriated under the Inflation Reduction Act (IRA) and the Infrastructure Improvement and Jobs Act (IIJA). Thus, the court found the states’ claims were not moot.

Likelihood of success. After determining that the states also had standing to challenge the Directive, the court addressed the defendants’ argument that it did not have subject matter jurisdiction over their APA claims because the Directive and related guidance were not final agency actions as the Directive did not determine which funds or grants should be paused but required agencies to make their own determinations under their respective authorities.

Disagreeing, the court found that the Directive “amounted to a command, not a suggestion,” that the agency heads execute a categorical, indefinite funding freeze to align funding decisions with the President’s priorities. Such a command, said the court, together with the agencies swift actions to execute the funding freeze, marked the “consummation of each agency’s decisionmaking process to comply with the President’s executive order, the OBM [Directive], or both.”

This same analysis, the court continued, also applied to the agencies’ actions in implementing funding pauses under the Unleashing Guidance, which instructed agencies to immediately pause disbursement of funds under the IRA or IIJA and did not even attempt to allow for agency discretion.” Accordingly, the court found the agencies’ actions sufficed as “final agency action.”

Merits. In support of their contention that they are likely to succeed on their claim the defendants’ implementation of the federal funding freeze is contrary to law and ultra vires, the states argued that the defendants exceeded their statutory authority when imposing the challenged federal funding freeze. The Congressional Budget and Impoundment Control Act (ICA), they argued, permits the Executive Branch to “impound,” or decline to spend, federal funds only under a very small set of highly circumscribed conditions that were not present here. They also asserted that the ICA requires that the President send a special message to Congress explaining proposed deferrals.

Special message. Finding the Directive and one of the EOs at issue constituted a budget authority deferral because they commanded—and prompted—an indefinite withholding or delay of obligated funds, the court agreed that the President was required to send a special message to Congress detailing the proposed deferrals. Noting that there was no evidence such a message was ever sent, the court found the states demonstrated a likelihood of success in proving the Executive’s actions were contrary to law when bringing about a deferral of budget authority without sending a special message to Congress as the ICA requires.

Further, said the court, the states provided clear examples in which Congress appropriated funds to federal programs and strictly prescribed how those funds were required to be expended. The agencies, however, halted the disbursement of these grants when freezing appropriated funds to ensure spending conformed with the President’s policy priorities. Pointing out that “[a]bsent congressional authorization, the Administration may not redistribute or withhold properly appropriated funds in order to effectuate its own policy goals,” the court found sufficient evidence that, “in implementing the funding freeze, the Agency Defendants withheld funding that Congress did not tie to compliance with the President’s policy priorities in the OMB Directive and the Unleashing EO.” Accordingly, the states established a likelihood of success on the merits that the agencies violated the APA in exceeding their statutory authority to carry out a categorical federal funding freeze.

Arbitrary and capricious. Nor, said the court, did the defendants provide a rational reason that the need to “safeguard valuable taxpayer resources” was justified by such a sweeping pause of nearly all federal financial assistance with such short notice. “Rather than taking a deliberate, thoughtful approach to finding these alleged unsubstantiated ‘wasteful or fraudulent expenditures,’ the Defendants abruptly froze billions of dollars of federal funding for an indefinite period,” said the court, noting further that the “OMB Directive essentially ordered agencies to effectuate the blanket pause and then decide later which funding streams they actually had lawful authority to withhold.”

The court also found the agencies’ categorical freeze of funding appropriated under the IRA and IIJA was likely substantively unreasonable in violation of the APA. The agencies implemented sweeping pauses of IRA/IIJA appropriated funds despite various funding streams being governed by statutory commands that did not give discretion to withhold funds based on the policy initiatives the President sought to further. Accordingly, the court found the states showed a likelihood of success on their APA claims.

Irreparable harm. Regarding irreparable harm, the court noted that the states provided numerous examples of obligated funding and the harm that withholding such funding has caused. In response, the defendants argued only that the freeze would end eventually, presumably when the agencies have reviewed all of the funding and made decisions about whether any or all or some align with how the President wants that money spent.

Noting that IIJA and IRA funding programs are subject to the freeze and threaten the loss of essential services to protect the health, safety, and welfare of the states’ residents, the court pointed out that “Congress enacted these statutes and appropriated these funds for legitimate reasons, and the Defendants’ categorical freeze, untethered to any statute, regulation, or grant term, frustrates those reasons, and causes significant and irreparable harms to the States.”

As to the defendants’ contention that some funding has begun to flow after the entry of the TRO, the court pointed to evidence of harm resulting from the chaos and uncertainty of the defendants’ arbitrary decision to categorically freeze billions of dollars in federal funding. Indeed, while some funding has been restored in federal funding portals, the court noted that other portals appear to have been removed. “This litany of struggles experienced in the last seven weeks unquestionably constitute irreparable harm to the States.”

Balance of equities and public interest. Finally, the court found that the defendants are not harmed where the order requires them to disburse funds that Congress has appropriated to the states and they are enjoined only from actions that violate statutory appropriations and obligations. Without injunctive relief to pause the freeze, however, the court noted that “Congressional control of spending will have been usurped by the Executive without constitutional or statutory authority.”

Injunction. Accordingly, the court enjoined the agencies from reissuing, adopting, implementing, giving effect to, or reinstating under a different name the directives in the OMB Directive with respect to the disbursement and transmission of appropriated federal funds to the states under awarded grants, executed contracts, or other executed financial obligations. It also enjoined then from pausing, freezing, blocking, canceling, suspending, terminating, or otherwise impeding the disbursement of appropriated federal funds to the states under awarded grants, executed contracts, or other executed financial obligations based on the Directive, including funding freezes dictated, described, or implied by Executive Orders issued by the President before rescission of the OMB Directive or any other materially similar order, memorandum, directive, policy, or practice under which the federal government imposes or applies a categorical pause or freeze of funding appropriated by Congress.

The case is No. 25-cv-39-JJM-PAS.

Judge: McConnell, J., Jr.

Attorneys: Rabia Muqaddam, Office of the New York State Attorney General, for State of New York. Carly J. Munson, California Dept. of Justice, for State of California and State of Rhode Island. Daniel Schwei, U.S. Department of Justice, for Donald Trump, U.S. Office of Management and Budget, Matthew Vaeth, U.S. Department of the Treasury, U.S. Department of Health and Human Services, U.S. Department of Education, U.S. Federal Emergency Management Agency, U.S. Department of Transportation, U.S. Department of Labor, U.S. Department of Energy, U.S. Environmental Protection Agency, U.S. Department of Homeland Security and U.S. Department of Justice.

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