Rather than cutting off funds outright, the department placed the districts on a reimbursement-only system, delaying payments unless the schools change their restroom and locker room policies.

The school divisions sued, arguing the federal government is misinterpreting Title IX and unlawfully using federal funding to coerce local policy changes. They contend their policies are required by the 4th Circuit’s 2020 ruling in Grimm v. Gloucester County School Board, which LGBT advocates cite as having found that policies which bar transgender students from bathrooms aligned with gender identity violate federal law.

U.S. District Judge Rossie Alston, an appointee of President Donald Trump, dismissed the lawsuit earlier this year, citing the Supreme Court’s decision in Department of Education v. California. That ruling held that disputes “founded upon” federal grant agreements are contractual in nature and must be brought in the U.S. Court of Federal Claims under the Tucker Act, not in federal district court.

The school divisions appealed, arguing their case seeks judicial review of unlawful agency action under the Administrative Procedure Act.

During Thursday’s argument, Timothy Heaphy, an attorney representing the districts, said the dispute centers on statutory interpretation and not contract enforcement.

“What it involves is not the terms of a contract,” Heaphy told the panel, “but rather the substantive interpretation of Title IX and the equal protection clause.”

Justice Department lawyer Abhishek Kambli pushed back on Heaphy’s argument, arguing the recent Supreme Court precedent foreclosed attempts to separate grant conditions from grant contracts.

“Their argument that grants are not contracts — that’s foreclosed by recent Supreme Court precedent,” Kambli said, adding that the districts would not be in court absent the funding consequences.

U.S. Circuit Judge Allison Rushing, a Trump appointee, pressed the government on whether Title IX itself contemplates judicial review outside the U.S. Court of Federal Claims, noting that the statute provides specific procedures for appealing funding enforcement actions.

“Why wouldn’t the district court have jurisdiction over any part of this suit?” Rushing asked, questioning whether the Education Department’s “high risk” designation could be challenged independently of funding disputes.

U.S. Circuit Judge Julius Richardson, also appointed by Trump, appeared more receptive to the government’s position, suggesting that adding conditions to federal grants places the dispute squarely within contract law, even if those conditions are justified by Title IX.

America First Legal, a pro-Trump law group that filed an amicus brief supporting the federal government, argued the school divisions are misreading Grimm v. Gloucester County School Board. The group said the case “turn[s] on the meaning of Title IX with respect to school restroom and locker room policies” and noted that it has “taken a contrary position on the meaning of Grimm in several cases.”

AFL also argued that the districts are attempting to bypass Supreme Court precedent governing federal grants by reframing a funding dispute as a civil rights challenge.

EDUCATION DEPARTMENT FINDS CALIFORNIA SCHOOLS HID STUDENTS’ GENDER TRANSITIONS FROM PARENTS

The case comes as the Trump administration ramps up enforcement against school districts with progressive transgender policies, including with a recent Justice Department lawsuit against neighboring Loudoun County over alleged equal protection violations against Christian students.

Chief U.S. Circuit Judge Albert Diaz, an appointee of President Barack Obama, rounded out the panel, which did not indicate when it would rule.