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Cahoo v. SAS Analytics Inc.

United States Court of Appeals, Sixth Circuit

January 3, 2019

Patti Jo Cahoo and Kristen Mendyk, individuals; Khadija Cole, an individual and on behalf of similarly situated; Hyon Pak; Michelle Davison, Plaintiffs-Appellees,
v.
SAS Analytics Inc., et al., Defendants, Julie A. McMurtry (18-1295); Steven Geskey, Shemin Blundell, Dorris Mitchell, Debra Singleton, and Sharon Moffet-Massey (18-1296), Defendants-Appellants.

          Argued: October 18, 2018

          Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 2:17-cv-10657-David M. Lawson, District Judge.

         ARGUED:

          Jason Hawkins, OFFICE OF THE MICHIGAN ATTORNEY GENERAL, Lansing, Michigan, for Appellants.

          Kevin S. Ernst, ERNST & MARKO LAW, PLC, Detroit, Michigan, for Appellees.

         ON BRIEF:

          Jason Hawkins, Emily A. McDonough, Debbie K. Taylor, OFFICE OF THE MICHIGAN ATTORNEY GENERAL, Lansing, Michigan, for Appellants.

          Jonathan R. Marko, MARKO LAW PLC, Detroit, Michigan, for Appellees.

          Before: KEITH, CLAY, and NALBANDIAN, Circuit Judges

          OPINION

          CLAY, CIRCUIT JUDGE

         Julie McMurtry, Steven Geskey, Shemin Blundell, Dorris Mitchell, Debra Singleton, and Sharon Moffet-Massey (together the "Individual Agency Defendants") appeal the district court's decision denying their Motion to Dismiss ("Motion") based on qualified immunity, in this 42 U.S.C. § 1983 action alleging that the Individual Agency Defendants implemented and oversaw an automated computer system that falsely determined that Plaintiffs had committed unemployment insurance fraud and deprived Plaintiffs of protected property interests as a result of those erroneous fraud determinations, without providing Plaintiffs with adequate pre-deprivation notice, in violation of the Fourth and Fourteenth Amendments.[1]

         For the reasons stated below, this Court AFFIRMS IN PART, and REVERSES IN PART, the district court's decision. This Court AFFIRMS the district court's denial of the Individual Agency Defendants' Motion with respect to Plaintiffs' due process claim. However, this Court REVERSES the district court's denial of the Motion with respect to Plaintiffs' equal protection and Fourth Amendment claims.

         STATEMENT OF FACTS

         A. Michigan's Automated System for Detection of Fraudulent Unemployment Benefits Claims

         The state of Michigan administers unemployment benefits to eligible claimants. To receive benefits, claimants must demonstrate that they were employed by a covered employer, that they did not leave their employment because of work-related misconduct, and that they satisfy wage and income requirements. Once claimants satisfy these eligibility requirements, they are entitled to benefits under state and federal law.

         In October 2013, Michigan's Unemployment Insurance Agency ("Agency") began administering Michigan's unemployment benefits system through an automated program called MiDAS. The Agency designed, created, and implemented MiDAS to render automated determinations of fraudulent conduct.[2] MiDAS searched for discrepancies in the records of individuals who were receiving-or who, in the six years prior to the program's introduction, had received-unemployment insurance benefits. The Agency had access to claimant records from employers, state agencies, and the federal government; it coordinated with those entities and "cross-checked" information about claimants that could affect their eligibility for benefits. (Compl. at PageID #763, ¶50.)

         When MiDAS detected unreported income or "flagged" other information about a claimant, it initiated an automated process to determine whether the individual had engaged in fraudulent behavior. (Id. at ¶51.) For instance, MiDAS flagged claimants if it detected any discrepancy between information submitted by a claimant when applying for benefits and a record submitted by an employer. MiDAS did not investigate whether these discrepancies resulted from employer error or were the product of a good-faith dispute. MiDAS also flagged claimants through an "income spreading" formula; MiDAS calculated a claimant's income in a fiscal quarter and averaged the claimant's weekly earnings, even if the claimant did not actually make any money in a given week. (Id. at PageID #751, ¶8.) If the employee reported no income for any week during a quarter in which he or she earned income, MiDAS automatically determined that the claimant had engaged in fraud. The Agency made no effort to assess whether the claimant truthfully reported no income for the week(s) in question.

         When a claimant was "flagged" for possible fraud, MiDAS did not inform the claimant about the basis for the Agency's suspicion or provide the claimant with any information to allow him or her to rebut the fraud charge. (Id. at PageID #764, ¶52.) MiDAS did not allow for a fact-based adjudication or give the claimant the opportunity to present evidence to prove that he or she did not engage in disqualifying conduct. Instead, MiDAS automatically sent claimants multiple-choice questionnaires. Claimants were told they had ten days to respond to the potential disqualification by answering the following questions:

Did you intentionally provide false information to obtain benefits you were not entitle[d] to receive?
Yes No
Why did you believe you were entitled to benefits?
1. I needed the money
2. I had not received payment when I reported for benefits
3. I reported the net dollar amount instead of the gross dollar amount paid
4. I did not understand how to report my earnings or separation reason
5. I thought my employer reported my earnings for me
6. Someone else certified (reported) for me
7. Someone else filed my claim for me
8. Other

(Id. at PageID #764-65, ¶57.) The questionnaires did not provide the claimants with any information about why the Agency suspected they had engaged in fraud.

         If a claimant answered any of the questions in the affirmative, or failed to respond to the questionnaire in ten calendar days, "MiDAS robo-adjudicated the fraud issue and automatically determined that the claimant knowingly and intentionally misrepresented or concealed information to unlawfully receive benefits." (Id. at PageID #765-66, ¶63.) From October 2013 to August 2015, MiDAS exclusively determined whether claimants engaged in fraud-no human being took part in this process.

         MiDAS sent the questionnaires to claimants' accounts established online on the Michigan Web Account Management System. But many claimants' accounts were dormant; MiDAS reviewed unemployment benefits claims starting six years before MiDAS became operational, and many claimants did not have a reason to check their accounts. And MiDAS did not take any additional steps-such as sending emails, regular mail, or making phone calls-to notify claimants that the questionnaire had been sent.

         When MiDAS determined that a claimant committed fraud, the individual's right to benefits terminated immediately. In addition, claimants were automatically assessed severe monetary penalties: restitution and a penalty for fraudulent misrepresentation equal to four-times the amount of unemployment benefits received (or sought)-the maximum penalty permitted under state law. The Agency assessed the penalties even when claimants did not actually receive benefits. Many claimants were assessed penalties that ranged from $10, 000 to $50, 000. Some received penalties greater than $187, 000.

         After MiDAS determined that a claimant had committed fraud, the Agency automatically sent the claimant a statement letter. The letter demanded that the claimant repay benefits, penalties, and interest. The letter provided that "penalties for non-payment may include interception of the claimant's state income tax refund, interception of the claimant's federal income tax refund, garnishment of wages, and legal collection activity through a court of law." (Id. at PageID #767, ¶70.) The Agency often failed to send the letters, or sent them to the wrong address, because the Agency did not make any effort to verify that the statements were sent to the claimant's current address. The Agency also sent claimants a second form letter, titled a "Notice of Determination." (Id. at PageID #768, ¶80.) This letter stated, "Your actions indicate you intentionally misled and/or concealed information to obtain benefits you were not entitled to receive." (Id. at ¶81.) But the Notice of Determination letter did not inform claimants about the factual basis for the fraud determinations. The Notice of Determination letter also included a document titled "Restitution (List of Overpayment)," which contained the overpayment amount and demanded repayment of the benefits allegedly received and the statutory penalty. (Id. at PageID #768-69, ¶82.)

         The only time real-life Agency employees evaluated a particular instance of suspected fraud was when a claimant filed an appeal. Claimants had 30 days to appeal the fraud determination to an Administrative Law Judge ("ALJ"). But "the vast majority" of claimants did not know about the fraud determination until the window to appeal had expired and they had been assessed thousands of dollars in fines. (Id. at PageID #778, ¶139; id. at PageID #769, ¶86.) And when claimants attempted to appeal, Agency employees informed them that they could not appeal because more than 30 days had passed, even if the claimants still had the right to appeal because they never received notice. Furthermore, according to the Michigan Auditor General, the Agency never answered over 90% of the calls to its "Help Line." (Id. at ...


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