When More Parameters Hurt: Foundation Model Priors Amplify Worst-Client Disparity Under Extreme Federated Heterogeneity

Federated learning (FL) is increasingly used to fine-tune foundation models (FMs) on distributed private data. The community largely assumes that large-scale pretraining serves as a 'rising tide that lifts all boats' in federated settings. However, our experiments reveal that these powerful priors can hinder rather than help the most disadvantaged clients under extreme heterogeneity. Through controlled experiments on federated text classification, we compare worst-client accuracy between TextCNN (2.7M parameters) and DistilBERT with Low-Rank Adaptation (LoRA, 66M parameters) across four Non-IID heterogeneity levels. Under extreme label skew (alpha = 0.1), DistilBERT+LoRA produces a worst-client accuracy gap of 50.1% -- 56% larger than TextCNN's 32.2% gap, despite having 25x more parameters and extensive pretraining. Under moderate heterogeneity (alpha >= 0.5), the pattern reverses: the FM nearly eliminates the gap. We call this the FM Fairness Paradox. We further show that an inverse-weighted LoRA aggregation method (FedAvgW) does not resolve the disparity, suggesting aggregation reweighting alone may be insufficient. Our results highlight the need for mechanisms that explicitly protect minority clients before deploying foundation models in high-stakes federated contexts such as healthcare and education.