Fourteen Democratic states have filed a federal complaint seeking to recover more than $100 million in grants connected to a Biden era COVID-19 relief package. The Trump administration canceled the grants last year, setting up the latest dispute over federal funding priorities.

The complaint was filed Friday in the U.S. Court of Federal Claims. It argues that the Trump Labor Department breached its contracts by terminating grants intended to modernize outdated information technology systems used by state unemployment programs.

The grants originated with the $1.9 trillion American Rescue Plan Act, which Democratic President Joe Biden signed into law in 2021. The package was promoted as an economic stimulus and relief measure responding to the health and economic effects of the COVID-19 pandemic.

The legislation resulted in $780 million being awarded to states for unemployment system modernization. Roughly $45 million in grants were terminated following a Labor Department decision announced in May 2025.

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“These grants are being terminated because they no longer effectuate the Department’s priorities for its grant funding,” the agency said when notifying states about the decision.

That explanation was included in a congressional notification obtained by Nextgov/FCW, an online news and technology information platform. The states, however, argue that the department could not simply walk away from grants that had already been competitively awarded.

Attorneys general from California, Colorado, Delaware, Maine, Maryland, Michigan, New Jersey, New Mexico, New York, Oregon, and Washington filed the suit. The governors of Kentucky and Pennsylvania also joined the legal action.

The complaint characterizes the dispute as a straightforward contract matter involving money appropriated after the pandemic strained state unemployment systems. Those systems faced a surge of claims while relying on information technology that the complaint describes as outdated.

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“This case is a breach-of-contract action arising from the U.S. Department of Labor decision to unilaterally terminate competitive grants that were awarded,” the complaint reads.

The complaint further states, “ARPA funding was appropriated during and as a result of the COVID-19 pandemic, the economic impact of which caused a historic surge in claims for unemployment insurance that strained states’ often-outdated IT systems.”

The federal government’s COVID public health emergency had already ended before the Trump administration announced the grant terminations. The Centers for Disease Control and Prevention declared an end to that federal emergency in May 2023.

Illinois Attorney General Kwame Raoul defended the funding as a tool for improving unemployment insurance administration. He said the grants were designed to help states detect fraud, prevent abuse, and make the claims process more accessible.

“Congress approved this funding for states to improve the administration of their unemployment insurance programs, so they can better detect and prevent fraud and make the unemployment claims process more accessible,” Raoul said regarding the complaint.

He also accused the administration of working against its own stated interest in combating fraud. “This administration claims to be focused on rooting out fraud, while simultaneously eliminating tools that help states do just that.”

“I will continue to fight back against the Trump administration’s unlawful attempts to cancel crucial funding to states,” Raoul added. The case now asks the U.S. Court of Federal Claims to consider whether canceling the grants constituted a breach of the federal government’s contractual obligations.

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