Cahoo v. Sas Inst. Inc.

Decision Date02 March 2018
Docket NumberCase Number 17–10657
Citation322 F.Supp.3d 772
Parties Patti Jo CAHOO, Kristen Mendyk, Khadija Cole, Hyon Pak, and Michelle Davison, Plaintiffs, v. SAS INSTITUTE INC., FAST Enterprises LLC, CSG Government Solutions, Stephen Geskey, Shemin Blundell, Doris Mitchell, Debra Singleton, Julie A. McMurtry, Sharon Moffet–Massey, Clayton Tierney, Andrew Phillips, Jeremy Gragg, Jennifer Tuvell, Kristen Araki–Tokushige, Mike Patterson, Allison Forgie–McClurg, Richard Staten, Rebecca Rosier, Dana Rowe, Tim Palmer, Steven Goodhall, and Paul Pluta, Defendants.
CourtU.S. District Court — Eastern District of Michigan

Anthony D. Paris, John C. Philo, Kevin S. Ernst, Jonathan R. Marko, Ernst & Marko Law, PLC, Tyler M. Joseph, Marko Law PLC, Detroit, MI, Craig E. Hilborn, Hilborn & Hilborn, Birmingham, MI, Kevin C. Riddle, Fieger Law, Southfield, MI, for Plaintiffs.

Craig E. Stewart, Holland & Hart LLP, Denver, CO, Erik F. Stidham, Holland & Hart LLP, Boise, ID, Walter J. Piszczatowski, Bloomfield Hills, MI, Andrew M. Harris, Kitch, Drutchas, Wagner, Valitutti & Sherbrook, Kimberly Pendrick, State of Michigan, Detroit, MI, John D. Fitzpatrick, Stephen J. Rosenfeld, Mandell Menkes LLC, Chicago, IL, Zachary A. Risk, Emily A. McDonough, Debbie K. Taylor, Department of Attorney General, Lansing, MI, Stephanie A. Douglas, Susan M. McKeever, Bush Seyferth & Paige, Troy, MI, for Defendants.

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS AND SCHEDULING CASE MANAGEMENT CONFERENCE

DAVID M. LAWSON, United States District Judge

In 2012, the State of Michigan's Unemployment Insurance Agency (UIA) implemented a new automated system to detect and punish individuals who submitted fraudulent unemployment insurance claims. By most accounts, the system did not work well, as it lacked human oversight, it detected fraud by certain claimants where none existed, it provided little or no notice to the accused claimants, it failed in many instances to allow administrative appeals, and it assessed penalties and forfeitures against individuals who were blameless. The plaintiffs are members of a putative class of unemployment insurance claimants who wrongfully were subjected to these false fraud determinations made by the State's automated fraud detection system. They contend that they are collateral damage in the State's war on fraud, and they have sued the companies and individuals whom they believe the State enlisted as its soldiers and officers in that battle. They have asserted a number of theories under federal and state law. In another case brought by different plaintiffs, this Court found flaws in the State's robo-fraud-detection system, and eventually approved a settlement agreement in which the State agreed, among other things, to suspend all collection activity under the automated system (and Michigan enacted new legislation that prohibits fraud determinations based solely on computer-identified discrepancies). See Zynda v. Arwood , 175 F.Supp.3d 791 (E.D. Mich. 2016). That case addressed prospective relief only against the State. Id. at 800–01. The plaintiffs in this case seek damages for the past harm visited on them by the computer-driven fraud detection system.

All of the defendants have filed motions to dismiss, based on various theories, and the Court heard oral argument on the motions. There is no question these contracted companies and individuals, working along side State officials, played some role in implementing a defective system that placed a significant financial burden on unemployment beneficiaries, and they acted under color of state law when doing so. However, many (but not all) of the claims alleged have little basis in law or are unsupported by pleaded facts necessary to survive dismissal. For the reasons discussed below, each motion to dismiss will be granted in part and denied in part.

I. Facts

The facts come from the amended complaint and the relevant documents referencedin it that were attached to the motion papers.

A. The Plaintiffs

The amended complaint names five class representatives. Patti Jo Cahoo contends that she was falsely charged with filing a fraudulent claim in 2014 after receiving unemployment benefits, but did not learn of the determination until 2015 when she was denied benefits upon reapplying. She was subsequently evicted from her home and suffered other emotional distress as a result.

Kristen Mendyk was accused of making a fraudulent claim after receiving unemployment benefits in 2009, but was not notified of the determination until November 2016. As a result, she filed for bankruptcy and suffered emotional distress.

Khadija Cole, a year after receiving unemployment benefits, received a letter notifying her—for the first time—of a fraud determination and assessing a penalty of $29,000.

Michelle Davison's 20152016 state and federal income tax refunds were seized based on false fraud determinations, which she was unaware of until she received a letter from the IRS informing her of the seizure. She was not given prior notice, 60 days to present evidence to oppose the seizure, or consideration.

Hyon Pak's 20122014 federal income tax refunds also were seized based on false fraud determinations. He similarly was deprived of notice and opportunity to present evidence.

B. The Automated Fraud Detection Systems

Sometime around 2012, the UIA implemented a "system rewrite" that was based primarily on a computer program to detect and control alleged unemployment insurance fraud. The platform—known as the Michigan Integrated Data Automated System (MiDAS)—was created to search for discrepancies in the records of unemployment compensation recipients. As part of the new system, the UIA coordinated collection procedures with employers, other state agencies, and the federal government. MiDAS's electronic "cross-checking" mechanism alerted the UIA when income was reported for claimants or when some activity affected a claimant's eligibility for benefits. MiDAS, using an "income-spreading" formula, would calculate a claimant's weekly income based on an average of total income received over a quarter, and then "spread" the income over each week in the quarter, regardless of whether a claimant truthfully reported no income in one or more weeks. If the system identified a discrepancy between an employer record and corresponding information in the claimant's application, the claimant's file was flagged as a potential case of misrepresentation. MiDAS would then initiate an automated process that could have resulted in termination of benefits, the imposition of restitution and penalties, and criminal prosecution.

Once a claim was "flagged" as potentially fraudulent, the UIA's system automatically transmitted questionnaires to the claimant, seeking a response within ten days. The questionnaires posed multiple choice questions that resulted in a robo-determination of fraud if a triggering answer were selected. (E.g., "Did you intentionally provide false information to obtain benefits you were not entitled to receive? Yes/No"). Although the questionnaires were prompted by a computerized "suspicion" of fraud, the notice to the claimant did not include the UIA's basis for that suspicion or grounds for potential disqualification.

However, not every person alleged to have made a fraudulent claim received a questionnaire. The questionnaires were to be shared with claimants via their Michigan Web Account Management System (MiWAM) accounts, but in some instances, the system failed to send the questionnaires, or the questionnaires were sent to dormant MiWAM accounts. And because MiDAS reviewed claims from the six preceding years, questionnaires were sent to claimants whose benefits had expired already. The system did not provide any other means of notifying claimants of the questionnaire's existence. Unless a questionnaire actually was sent to a claimant and that claimant regularly checked her MiWAM account, that claimant received no notice of the alleged fraud determination. Failure to respond to the questionnaire within ten calendar days as well as selecting one of the triggering answers in the questionnaire resulted in a default determination that the claimant knowingly and intentionally misrepresented or concealed information to receive benefits unlawfully.

Once a default determination was made, an initial letter demanding repayment and assessing penalties and interest was to be issued to the claimant. There was no opportunity to appeal or otherwise contest the finding at that point in the process. The statement sent to claimants indicated that penalties for non-payment may include interception of the claimant's state and federal income tax refunds, garnishment of wages, and legal collection activity through a court of law. The punitive assessments regularly totaled between $10,000 and $50,000 and sometimes exceeded $187,000. As was the case with the questionnaires, in some instances, the letters were never mailed to the claimants or were sent to incorrect addresses. The UIA did not verify that the addresses on record were the claimants' current addresses. Moreover, many attempts by claimants to appeal or assert procedural rights were ignored. Some of those claimants who tried to reach the UIA by writing received no acknowledgment that their appeals were received or considered.

In addition to the initial notification letter, the UIA sent claimants a letter entitled "Notice of Determination" that alerted them to the fraud allegation. The letter informed claimants that their actions intentionally misled or concealed information to obtain benefits that they were not entitled to receive, but did not provide any factual basis for that determination. It also announced that benefits were terminated on any active claims and required claimants to pay the amount assessed in an attached document titled "Restitution (List of Overpayment)." The amount included repayment of actual benefits paid as well as a...

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