Cahoo et al v. SAS Analytics Inc. et al
Filing
124
OPINION AND ORDER granting in part and denying in part 55 Motion to Dismiss; granting in part and denying in part 58 Motion to Dismiss; granting in part and denying in part 61 Motion to Dismiss. Signed by District Judge David M. Lawson. (DTof)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
PATTI JO CAHOO, KRISTEN
MENDYK, KHADIJA COLE, HYON
PAK, and MICHELLE DAVISON,
Plaintiffs,
Case Number 17-10657
Honorable David M. Lawson
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.
________________________________________/
OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANTS’ MOTIONS TO DISMISS
AND SCHEDULING CASE MANAGEMENT CONFERENCE
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 referenced in it that
were attached to the motion papers.
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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 2015-2016 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 2012-2014 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
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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
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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
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of actual benefits paid as well as a statutory penalty for fraudulent misrepresentation of four times
that amount. The penalty could have been assessed even if the claimant never actually received
benefits from the UIA and without regard to the circumstances of the case.
After the second notification letter was issued, the claimant was entitled to appeal a
determination of fraud to an Administrative Law Judge (ALJ) within 30 days. But because of the
errors in notifying claimants noted above, many claimants often did not become aware of their
assessment until after the appeal deadline passed. When claimants received actual notice, they were
told by UIA employees that the lapsed deadline foreclosed their right to appeal. It likely was not
until this stage of the process that actual UIA agents took part in evaluating fraud determinations.
According to the plaintiffs, the Michigan Auditor General determined that well over 90% of appealsrelated calls made to the UIA were never answered, including the last 50,000 calls made to the
Agency at the time of the audit.
Moreover, even if claimants were granted an appeal, the plaintiffs say that the UIA’s recordkeeping practices made it all but impossible to rebut the charges. For instance, when MiDAS
became operational, all claim information was stored in a “legacy” system and hard copies were not
maintained. Although the State, through MiDAS, could access claimant information to make
automated fraud determinations, individuals had no access to the materials and were often not
provided copies of the information upon which MiDAS relied to make those determinations.
Furthermore, the UIA began a practice of sending ex-parte communications to ALJs who heard the
post-deprivation appeals, in which the UIA set forth the basis for its fraud determination. When
some ALJs expressed concern over those practices and over the high rate of invalid — albeit
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untimely — fraud appeals, they were removed from hearing fraud cases by defendant McMurtry and
other state officials.
The use of a “robo-adjudication” system had significant consequences. In the years material
to this suit, the UIA largely did not employ any human review in making these automated
determinations. Between October 2013 and August 2015, MiDAS made all fraud determinations.
After August 2015, the UIA continued to use MiDAS, but made use of agency personnel to exercise
some oversight in the process. However, those personnel exercised no more discretion than their
MiDAS counterpart. Moreover, the UIA’s contingency fund swelled by approximately $152,000,000
between late 2012 and October 2016. Some claimants submitted payments to the UIA of $250 per
month, in perpetuity, to satisfy their assessed debts, even though the Michigan Auditor General
eventually determined that of the 22,427 robo-adjudications reviewed, over 93% did not involve
fraud at all. Claimants also were automatically ineligible for hardship waivers and deprived of their
right to a free advocate under Michigan’s Advocacy Assistance Program operated by the UIA.
C. The Defendants
The complaint alleges that three sets of private defendants designed, created, implemented,
or maintained the automated system employed by the UIA in adjudicating fraud determinations. The
plaintiffs allege there was input and feedback between all private defendants and state officials at
every stage of the process, and they all agreed to continue the process even after the defective
attributes of the system became widely known. The plaintiffs also allege that these defendants
opposed the discharge of a claimant’s restitution and penalty debt in bankruptcy with full knowledge
that the underlying fraud determinations were invalid and false. According to the amended
complaint, the defendants, respectively, engaged in the following conduct.
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1. FAST
FAST Enterprises, LLC is a software company with its principal place of business in
Centennial, Colorado. Around August 2011, FAST contracted with the State to design, create,
implement, configure, control and maintain the MiDAS software used by the Agency to administer
unemployment insurance, including fraud investigation, overpayments, collections, and tax
intercepts. The amended complaint names the following FAST agents, sued in their individual
capacity:
a.
b.
c.
d.
e.
Jeremy Gragg, lead implementation consultant who worked on determination and
compliance;
Jennifer Tuvell, senior project manager;
Kristen Araki-Tokushige, senior business architect;
Mike Patterson, implementation manager; and
Allison Forgie-McClurg, test manager.
2. SAS
SAS Institute Inc. is a software company with its principal place of business in Cary, North
Carolina. Around December 2012, SAS Institute Inc. contracted with the State to design, create,
implement, maintain, configure and control the Enterprise Fraud Detection Software (EFDS) used
by the Agency to make unemployment insurance fraud determinations. According to the contract,
SAS agreed to provide a product that utilized data from the Department of Technology,
Management, and Budget (DTMB)’s Data Warehouse in the development of UIA Benefit and Tax
fraud detection analysis, and the results of that analysis would be integrated with MiDAS. The
contract describes the scope of the project in the following categories: requirements definition,
functional design, configuration, testing, implementation, warranty, and maintenance. The contract
expired in December 2017. SAS Project Manager Andrew Phillips is sued in his individual capacity.
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3. CSG
CSG is a consulting company with its principal place of business in Chicago, Illinois.
Around January 2010, CSG contracted with the State to run and administer the Project Control
Office, charged with oversight responsibility for all aspects of MiDAS. CSG continues to provide
full-time, on-site management to oversee MiDAS production, support, and additional initiatives
including:
a.
b.
c.
d.
e.
Collections, recoupments, and intercepts;
Integrity initiative for EFDS;
Implementation of the Interstate Reciprocal Overpayment Recovery Agreement;
UIA and Michigan Administrative Hearing System appeals improvement; and
Development of standard operating procedures for the UIA Tax Office.
The complaint names the following CSG agents, sued in their individual capacity:
a.
b.
c.
d.
e.
f.
Richard Staten, senior program manager;
Rebecca Rosier, senior program manager;
Dana Rowe, senior business analyst;
Tim Palmer, senior project manager;
Steve Goodhall, senior project manager; and
Paul Pluta, senior project manager.
4. UIA Employees
The complaint names seven UIA employees, sued in their individual capacity. Steve Geskey
was a high ranking supervisor at UIA, set policy, and directed subordinates to pursue false fraud
claims against claimants, the plaintiffs allege, despite knowing that those claims were invalid.
Shemin Blundell was the head of the UIA’s Fraud Unit where she allegedly directed subordinates
to pursue false fraud claims against claimants despite knowing that those claims were invalid. Doris
Mitchell was head of the UIA’s Friend of the Court and Bankruptcy Unit where she directed
subordinates to oppose discharge of claimants’ debt in bankruptcy proceedings that were based on
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allegedly false fraud claims despite knowing that the claims were invalid. Clayton Tierney was the
UIA projected manager for the integrated system rewrite. Debra Singleton was the head of the
Benefit Overpayment Collection Unit at the UIA, where she directed subordinates to pursue
aggressive collection activities. Sharon Moffet-Massey was the head of the UIA at all relevant times
and pursued the defective and unconstitutional policies alleged. The amended complaint does not
state Julie McMurtry’s position, but it alleges she removed some ALJs from hearing fraud appeals.
D. The Plaintiffs’ Claims
The plaintiffs filed a putative class action complaint for damages on March 2, 2017. It was
amended once, and now states seven counts under state law and six counts under federal law.
The state law claims, brought against the SAS and FAST defendants, are for negligent
production (Count 1), breach of implied warranty (Count 2), gross negligence/actual knowledge
(Count 3), breach of express warranty (Count 4), and failure to warn (Count 5), as well as one count
under state law as to the CSG defendants for negligence (Count 6) and one count under state law as
to all defendants for civil conspiracy (Count 13). The federal claims are directed against all
defendants. They are for denial of procedural due process (Count 7), equal protection (Count 8), and
substantive due process (Count 9), and violations of the Fifth Amendment’s Takings Clause (Count
10), the Fourth Amendment (Count 11), and 26 U.S.C. § 6402(f) (Count 12). In their response
briefs, the plaintiffs agreed that Count 10 is not ripe for adjudication and consented to its dismissal.
II. Discussion
The four groups of defendants each have filed motions to dismiss; many of their arguments
parrot each others, and they can be categorized into attacks on jurisdiction under Federal Rule of
Civil Procedure 12(b)(1), challenges to the merits under Rule 12(b)(6), and failure to join the State
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as a necessary party under Rule 12(b)(7). SAS Project Manager Andrew Phillips also alleges that
the Court has no personal jurisdiction over him, moving for dismissal under Rule 12(b)(2). The UIA
defendants also contend that they are entitled to qualified immunity from the federal claims alleged
against them.
A. Joinder of Necessary Party
The FAST, SAS, and CSG defendants all argue that the amended complaint must be
dismissed under Rule 12(b)(7), because the plaintiffs failed to join the State of Michigan as a
defendant, which, the defendants contend, is a necessary and indispensable party to the case. Joining
the State in a suit for money damages would be problematic for the plaintiffs, of course, because the
State enjoys sovereign immunity. But that problem is not presented here, because the State is neither
a necessary nor indispensable party to the plaintiffs’ surviving claims against those defendants.
The joinder rules compel plaintiffs to sue all persons who are necessary and indispensable
to the adjudication of the case. Local 670 v. International Union, United Rubber, Cork, Linoleum
and Plastic Workers of America, 822 F.2d 613, 618 (6th Cir. 1987). If an indispensable party cannot
be added to the case because the court has no personal jurisdiction over the person, or joinder would
upset subject-matter jurisdiction, joinder might be excused in some circumstances. Ibid. The Sixth
Circuit employs a three-step analytical framework to engage a “pragmatic approach” to the question,
as “‘an entire suit should not be dismissed if meaningful relief can still be accorded [even in the
party’s absence].’” Ibid. (quoting Smith v. United Brotherhood of Carpenters and Joiners of
America, 685 F.2d 164, 166 (6th Cir. 1982); see also Provident Tradesmens Bank & Trust Co. v.
Patterson, 390 U.S. 102, 116 n.12 (1968).
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When determining whether an absent person is indispensable, courts generally look first to
Rule 19(a)’s definitional language. Glancy v. Taubman Ctrs., Inc., 373 F.3d 656, 666 (6th Cir. 2004)
(noting that the first step in the process requires the court to “determine whether the person or entity
is a necessary party under Rule 19(a)”). Indispensability means that “(1) in the person’s absence
complete relief cannot be accorded among existing parties,” or, as relevant here, “(2) the person
claims an interest relating to the subject matter of the action and is so situated that the disposition
of the action in the person’s absence may . . . leave an existing party subject to a substantial risk of
incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.”
Fed. R. Civ. P. 19(a)(1)(A), (B)(ii).
The FAST, SAS, and CSG defendants all argue that the State, and the UIA in particular, is
a necessary party because it is the entity with whom these defendants contracted, and it controls the
system that the plaintiffs allege deprived them of their rights. They argue that in the absence of the
UIA, it is impermissible to adjudicate the legality of the State’s actions in administering the
unemployment insurance fraud detection system, and that the UIA should be the party to defend the
constitutionality of its program. The defendants also contend that the UIA’s absence may subject
them to multiple or inconsistent obligations.
Those arguments ignore the reality that UIA employees are parties to the case in their
individual capacities, and they have ample motive to defend the constitutionality of their actions.
The defendants contend that any ruling that their products and services violated the plaintiffs’
constitutional rights would affect the defendants’ contracts with the UIA, which has an irrevocable
license to use the offending software. They believe that the Court cannot accord complete relief
because the UIA would not be bound to any judgment, and it has a right to continue using the
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products and services under the contracts if it so chooses. But the plaintiffs are not seeking
prospective relief; they seek damages for past conduct. And, as the defendants point out, the UIA
apparently has agreed to discontinue its past robo-fraud determinations.
The defendants’ citation of Downing v. Globe Direct LLC, 806 F. Supp. 2d 461 (D. Mass.
2011), does not alter that analysis. In that case, the court held the State of Massachusetts was a
necessary party to a class action against a contracting company that mailed registration renewal
notices on behalf of the Registry of Motor Vehicles, which the plaintiffs alleged violated the Drivers’
Privacy Protection Act (DPPA). The court noted that “a party to a contract which is the subject of
the litigation is a necessary party.” Id. at 467 (citations omitted). But it said so in the context of the
plaintiff’s request that the defendant be enjoined from engaging in certain future conduct called for
by that contract. Because a finding that the challenged practice (using the plaintiffs’ personal
information to send them commercial advertisements) violated the DPPA “would effectively
invalidate Massachusetts’s contract,” id. at 467, the court held that the State should have a say in that
determination. Ibid. As noted earlier, however, the nature of the relief sought in this case is
different.
The plaintiffs do not seek relief based on breach of the various software design, manufacture,
or implementation contracts, or any other contract for that matter. Instead, they seek money damages
for past violations of their common law and constitutional rights. Any favorable judgment rendered
would not affect the State’s irrevocable license to use the products under the contracts.
The defendants relatedly argue that a victory for the plaintiffs may subject the defendants to
inconsistent obligations under their contracts with the State. They reason that if their software
products are found to play a role in depriving the plaintiffs of their procedural rights and subject
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them to erroneous fraud determinations, the defendants could be exposed to continuing liability if
the UIA continues to use the products, as its contract entitles it to do. That certainly would be a
problem for the defendants — although an unlikely one — but it has little to do with affording
“complete relief” to the parties on the backward-looking claims the plaintiffs have pleaded.
The UIA’s decision to use or discontinue use of the defendants’ software products and
services is largely governed by the settlement agreement in Zynda v. Arwood. That agreement
requires, among other things, the UIA to revamp its policies to comply with federal law, including
Department of Labor regulations prescribing procedures that affect fraud determinations and their
consequences. Its failure to do so might provoke a new claim or an action to enforce the settlement
agreement. But it would not have an impact on what’s been done already. A decision on the
plaintiffs’ constitutional or common law tort claims here would address only the defendants’ past
conduct.
The SAS and FAST defendants mention in their reply brief that the plaintiffs have failed to
explain how joint and several liability factors into Rule 19 analysis, and that liability here is several,
not joint. Those observations are not helpful to the defendants. If liability is several, no other parties
are necessary to decide an individual defendant’s case. And, as the Sixth Circuit has explained, “[i]n
a suit against one joint tortfeasor, a judgment for monetary relief can be completely satisfied without
the presence of any other defendant.” Laethem Equip. Co. v. Deere & Co., 485 F. App’x 39, 44 (6th
Cir. 2012). Therefore, “[a] person’s status as a joint tortfeasor does not make that person a necessary
party, much less an indispensable party.” PaineWebber, Inc. v. Cohen, 276 F.3d 197, 204 (6th Cir.
2001) (citing Temple v. Synthes Corp., 498 U.S. 5, 8 (1990)).
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The motion to dismiss under Rule 12(b)(7) will be denied, because the defendants have not
identified a necessary or indispensable party that has not been joined in this lawsuit.
B. Federal Claims
The plaintiffs allege that the defendants are liable for violating a variety of the plaintiffs’
constitutional and federal statutory rights, which they assert via 42 U.S.C. § 1983. To state a claim
under that statute, a plaintiff must plead facts that plausibly “‘establish (1) the deprivation of a right
secured by the Constitution or laws of the United States (2) caused by a person acting under the color
of state law.’” Dominguez v. Corr. Med. Servs., 555 F.3d 543, 549 (6th Cir. 2009) (quoting Sigley
v. City of Parma Heights, 437 F.3d 527, 533 (6th Cir. 2006)). The SAS and CSG defendants attack
each element (the FAST defendants have not raised the state action argument), which the Court
considers in reverse order.
The defendants assert these arguments under Rule 12(b)(6). The standards under that rule
are well known to the parties: the purpose of the motion is to allow a defendant to test whether, as
a matter of law, the plaintiffs are entitled to legal relief if all the factual allegations in the complaint
are taken as true. Rippy ex rel. Rippy v. Hattaway, 270 F.3d 416, 419 (6th Cir. 2001) (citing Mayer
v. Mylod, 988 F.2d 635, 638 (6th Cir. 1993)). The complaint is viewed in the light most favorable
to the plaintiffs, the allegations in the complaint are accepted as true, and all reasonable inferences
are drawn in favor of the plaintiffs. Bassett v. Nat’l Collegiate Athletic Ass’n, 528 F.3d 426, 430
(6th Cir. 2008). To survive the motion, the plaintiffs “must plead ‘enough factual matter’ that, when
taken as true, ‘state[s] a claim to relief that is plausible on its face.’ Bell Atl. Corp. v. Twombly, 550
U.S. 544, 556, 570 (2007). Plausibility requires showing more than the ‘sheer possibility’ of relief
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but less than a ‘probab[le]’ entitlement to relief. Ashcroft v. Iqbal, [556 U.S. 662, 678] (2009).”
Fabian v. Fulmer Helmets, Inc., 628 F.3d 278, 280 (6th Cir. 2010).
1. State Action
In order for liability to attach under section 1983, “the party charged with the deprivation
must be a person who may fairly be said to be a state actor.” Lugar v. Edmondson Oil Co., 457 U.S.
922, 937 (1982). That is because the Constitution protects citizens from infringement of their rights
by the government, not by private parties. Flagg Bros., Inc. v. Brooks, 436 U.S. 149, 156 (1978)
(recognizing that “most rights secured by the Constitution are protected only against infringement
by governments”) (citing Jackson v. Metro. Edison Co., 419 U.S. 345, 349 (1974); Civil Rights
Cases, 109 U.S. 3, 17-18 (1883)). Each of the SAS and CSG defendants contends that it (or he or
she) does not qualify as a state actor.
It is true that SAS and CSG are not organs of the State, and their employees do not work for
the State or its agencies. Nonetheless, private action can amount to state action “when the State
exercises ‘coercive power’ over the private entity, the State provides ‘significant encouragement,
either overt or covert’ to the private entity, or the private actor operates as a ‘willful participant in
joint activity with the State or its agents.’” Thomas v. Nationwide Children’s Hosp., --- F.3d ---, No.
17-3631, 2018 WL 844672, at *2 (6th Cir. Feb. 14, 2018) (quoting Brentwood Acad. v. Tenn.
Secondary Sch. Athletic Ass’n, 531 U.S. 288, 296 (2001) (citing cases)). Although the Supreme
Court has acknowledged that its “cases deciding when private action might be deemed that of the
state have not been a model of consistency,” Edmonson v. Leesville Concrete Co., Inc., 500 U.S.
614, 632 (1991) (O'Connor, J., dissenting), and “no one fact can function as a necessary condition
across the board for finding state action,” Brentwood Acad., 531 U.S. at 295, the instances where
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private parties have been found to be state actors fall into “two broad categories: the ‘public function
exception,’ and the ‘entanglement exception.’” Osler ex rel. Osler v. Huron Valley Ambulance Inc.,
671 F. Supp. 2d 938, 942 (E.D. Mich. 2009) (citing Chemerinsky, Constitutional Law at 517 (3d ed.
2009)).
The Sixth Circuit has interpreted the public function category narrowly, noting only functions
like holding elections, exercising eminent domain, and operating a company-owned town meet this
test. Chapman v. Higbee Co., 319 F.3d 825, 833-34 (6th Cir. 2003) (en banc). That category plays
no role here.
The entanglement category includes cases describing “state compulsion” of a private person’s
conduct, and cases where a “nexus” is found between private conduct and the state, such that it “is
entwined with governmental policies or when government is entwined in [its] management or
control.” Chapman, 319 F.3d at 834 (quoting Brentwood Acad., 531 U.S. at 295). Private parties
are deemed to be state actors when the state has affirmatively authorized, encouraged, or facilitated
the private unconstitutional conduct, or otherwise permitted a private actor to “exercise[] power
‘possessed by virtue of state law and made possible only because the wrongdoer is clothed with the
authority of state law.’” West v. Atkins, 487 U.S. 42, 49 (1988) (finding private physician under
contract with state to provide medical services to prison inmates was a state actor) (quoting United
States v. Classic, 313 U.S. 299, 326 (1941)). In fact “‘[i]t is well settled that private parties that
perform fundamentally public functions, or who jointly participate with a state to engage in
concerted activity, are regarded as acting “under the color of state law” for the purposes of § 1983.’”
United Pet Supply, Inc. v. City of Chattanooga, Tenn., 768 F.3d 464, 478 (6th Cir. 2014) (quoting
Bartell v. Lohiser, 215 F.3d 550, 556 (6th Cir. 2000)).
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The amended complaint alleges facts that support a finding of state action as to each of the
corporate defendants.
a. CSG Government Solutions
The amended complaint alleges that CSG ran and administered the Project Control Office,
charged with responsibility for all aspects of the State’s integrated system rewrite. The plaintiffs also
allege CSG continues to provide full-time, on-site management to oversee MiDAS production,
support, and several initiatives, including collections, recoupments, and intercepts as well as appeals
improvements. They believe CSG received significant encouragement from the State when it
implemented, configured, administered and maintained the defective and unconstitutional fraud
detection system. CSG argues that entering into a contract with the State does not mean it became
a state actor or was acting under color of law. As far as that argument goes, it is correct.
Rendell–Baker v. Kohn, 457 U.S. 830, 840 (1982) (holding that a private corporation whose business
depends primarily on public contracts with the state does not become a state actor solely because of
its “significant or even total engagement in performing public contracts”).
The plaintiffs have alleged more than that, however. First, there is no question that the
administration of unemployment benefits is a power traditionally exclusively reserved to the State.
Second, CSG’s contract suggests the State authorized CSG’s allegedly unconstitutional conduct. The
plaintiffs cite terms of CSG’s contract to describe the managerial authority delegated to it by the
State. Among the deliverables outlined in the contract, CSG’s Project Management Office was
required to “support the State — and the State’s application development and implementation vendor
— in meeting the timely delivery of quality information technology services for all stakeholders of
the UI System Modernization project.” It was also understood that the System Integration Project
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team would be comprised of both CSG’s Project Management Office and the State of Michigan DIT
and UIA staff. “[CSG] is responsible for utilizing and mentoring these State staff.” These terms
support the plaintiffs’ allegations that CSG, acting in concert with the State, was “entwined” with
the UIA in administering and maintaining the robo-fraud-adjudication system that deprived the
plaintiffs of their constitutional rights.
The plaintiffs adequately have pleaded state action with respect to CSG.
b. SAS Institute
The amended complaint alleges that SAS designed, created, implemented, maintained,
configured and controlled the EDFS used to make unemployment insurance fraud determinations.
It also alleges that SAS received significant encouragement from the State when it designed,
implemented, and maintained the defective and unconstitutional fraud detection systems. SAS
insists, however, that it was merely an independent contractor that provided software to the State.
But SAS’s contract also provides additional facts that support the plaintiffs’ allegation that
SAS maintained the system used to make fraud determinations, and justify the inference that SAS’s
actions are fairly attributable to the State. First, the plaintiffs have alleged SAS implemented and
maintained the system that aided in the administration of unemployment benefits. Second, SAS’s
contract suggests it was “entwined” with the State and played a non-negligible role in the automated
system. The contract requires SAS to schedule, coordinate, and perform all system testing activities
to validate that the product will operate in its intended environment, satisfies all user requirements,
and is supported with complete and accurate operating documentation. “The State will provide
assistance and input to assist [SAS] with the development of appropriate test data.” But SAS was
responsible for correcting defects discovered during testing and collaborating with the State to
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improve the system. With respect to system maintenance, the agreement states SAS is responsible,
among other obligations, for providing EDFS performance tuning and defect repair. Moreover, SAS
was to carry out this project under the direction and control of DTMB and UIA Project Managers.
These terms support the plaintiffs’ allegations in the complaint and suggest SAS acted “under color
of law.”
2. Personal Involvement
The object of “[p]ersonal-capacity suits” is “to impose personal liability upon a [state actor]
for actions he takes under color of state law.” Kentucky v. Graham, 473 U.S. 159, 165 (1985). To
support such a claim, the plaintiffs “must plead that each [state actor] defendant, through the
[person]’s own individual actions, has violated the Constitution.” Ashcroft v. Iqbal, [556 U.S. 662,
676 (2009). The individual defendants (including UIA employees) all contend that the amended
complaint falls short of that mark. As to the individual employees of SAS, FAST, and CSG, the
Court agrees. Not so with the individual UIA employees, however.
a. SAS, FAST, and CSG individual defendants
The amended complaint initially identifies the individually-named SAS, FAST, and CSG
employees as agents of their companies and describes their respective positions in paragraphs 12,
13, and 15. What follows, though are merely collective references to them in Counts 7-13 — the
1983 claims — without any distinction as to what acts are attributable to whom. Paragraphs 12 and
13 of the complaint include a generic recitation that the SAS and FAST defendants “designed,
created, implemented, maintained, configured and/or controlled” their respective software programs,
and that general description is followed by a brief reference to one or more agents and their job titles.
Paragraph 14 states that CSG continues to provide full-time, on-site management to oversee MiDAS
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production, support, and additional initiatives, and similarly lists job titles of six CSG employees.
And paragraph 20 clarifies that all subsequent references to “Defendants” means “all Defendants
unless otherwise indicated.”
Significantly, nowhere else in the complaint do the plaintiffs allege personal involvement of
any of the SAS, FAST, and CSG employees or attempt to distinguish their conduct in any way with
respect to the constitutional claims. Count 7 makes specific references to the State defendants, but
ultimately alleges that “Defendants’ actions and omissions constitute a deprivation of property
without due process guaranteed by the Fourteenth Amendment’s Due Process Clause.” ¶ 152.
Count 8 similarly makes categorical reference to “Defendants’ actions and omissions” in alleging
an equal protection violation. ¶ 157. Count 9, like Count 7, cites specific conduct by some of the
State defendants, but ultimately categorically alleges “Defendants’ conduct was arbitrary and
capricious and shocking to the conscience” to support a substantive due process claim. ¶¶ 175, 178.
In fact, it is not clear whether the plaintiffs, in making references to certain State defendants’ conduct
in Count 9, intended “Defendants” to mean only those State defendants. Moreover, Count 11 (as
renumbered) collectively refers to “Defendants” in alleging an unreasonable seizure under the Fourth
Amendment, without alleging facts specific to any individual defendant. ¶ 192. Count 12 states “at
least one of these Defendants participated in the seizure of the tax refunds” in violation of 26 U.S.C.
§ 6402(f)’s due process requirements. ¶ 196. Finally, Count 13 — assuming it is brought under §
1983 — states there was an agreement between “Defendants” and “each Defendant, individually or
through its agents” entered into a conspiracy to eliminate procedural guarantees. ¶¶ 199.
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Collective references to the defendants by themselves does not satisfy Iqbal’s individualized
pleading requirement. Marcillis v. Twp. of Redford, 693 F.3d 589, 596 (6th Cir. 2012). For the
SAS, FAST, and CSG employees, that is all there is.
The plaintiffs point out that personal involvement can be established in many ways, including
by alleging defendants abandoned the duties of their positions. They rely on Taylor v. Michigan
Dep’t of Corrections, 69 F.3d 76, 81 (6th Cir. 1995), where the court rejected a defendant’s summary
judgment challenge because of a triable question of fact on whether a prison supervisor properly
discharged his duties. That case is no help to them, however, because there was evidence in that
record that the supervisor failed to “adopt[] and implement[] an operating procedure that would
require a review of the inmate’s files before authorizing the transfers in the face of actual knowledge
of a breakdown in the proper workings of the department.” Ibid. Here at the pleading stage, no such
analogous individualized facts are alleged.
The Court will grant the motions to dismiss the federal claims against the individually named
SAS, FAST, and CSG employees.
b. State defendants
The amended complaint does a better job of alleging constitutional violations against some
of the State defendants. The State defendants argue that the plaintiffs fail to specify what each State
defendant did or said and to whom, when the alleged action occurred, or how the alleged conduct
supports any of the constitutional violations. The Court does not agree.
The complaint names seven State defendants — although the section introducing the
“Defendants” only provides descriptions of four of them — and includes slightly more detail about
their involvement in the fraud adjudication system:
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16.
Defendant Geskey was at all material times a high ranking supervisor at the
Agency. He set policy and continued to direct subordinates to pursue the
invalid and false fraud claims against claimants despite the knowledge that
the fraud claims were invalid and false. He is sued in his individual capacity.
17.
Defendant Blundell was at all material times the head of the Fraud Unit
within the Agency. She continued to direct subordinates to pursue the invalid
and false fraud claims against claimants despite the knowledge that the fraud
claims were invalid and false. She is sued in her individual capacity.
18.
Defendant Mitchell was at all material times head of the Friend of the Court
and Bankruptcy Unit within the Agency. She continued to direct
subordinates to oppose discharge of claimants’ debt in bankruptcy
proceedings that was based on the invalid and false fraud claim despite the
knowledge that the fraud claims were invalid and false. She is sued in her
individual capacity.
19.
Defendant Clayton Tierney was at all material times the UIA project manager
for the integrated system rewrite. He is sued in his individual capacity.
There are other allegations in the amended complaint that identify the individual State
defendants and actions they took, exception for defendant Tierney:
140.
Further, the state Defendants instructed rank and file Agency employees to
inform claimants that they could not appeal the fraud determinations and
penalty assessments after 30 days, even if the claimants did not receive notice
and thus had the right to appeal.
147.
When certain ALJs expressed concerns over the Agency’s practices and
began criticizing the Agency after witnessing the extremely high rate of
invalid fraud determinations that were being appealed, often unsuccessfully
because of missed deadlines, some of the ALJs were removed from hearing
fraud cases by Defendant McMurtry in conjunction with other state
officials.
162.
On information and belief, Defendant Steve Geskey, a policy-making
supervisor at the Agency, ordered deputy state attorneys general as well as
other subordinates to continue to conduct business as usual, to continue to
allow MiDAS to make the invalid determinations, to continue to contest
claimants’ protests and appeals and continue with collection activities.
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163.
On information and belief, Defendant Mitchell, at relevant times the head
of the Friend of the Court and Bankruptcy Unit at the agency, instructed
various deputy attorneys general to continue to oppose claimants’ attempts
to discharge the fraud-based debt in bankruptcy proceedings by filing
adversary proceedings, even when it was obvious that the underlying
judgement, which often included five times the amount of unemployment
insurance paid (or even claimed), plus interest, was based on an invalid fraud
determination.
164.
On information and belief, Defendant Blundell, at relevant times the head
of the Fraud Unit at the Agency, continued to instruct her subordinates,
including the claims examiners, to pursue the invalid fraud charges.
167.
On information and belief, Defendant Singleton was at relevant times the
head of the Benefit Overpayment Collection Unit at the Agency.
168.
Despite knowing of the over 93% margin of error rate for fraud
determinations, she continued to direct subordinates to pursue aggressive
collection activities which included tax refund intercepts and wage
garnishments.
169.
Defendant Moffet-Massey was the head of the Agency at relevant times.
170.
Despite her knowledge of the severe problems in the fraud determination
procedures and the outrageous collection actions against innocent citizens of
the State, she continued to pursue the same defective and unconstitutional
policies.
171.
These Defendants had actual knowledge of a breakdown in the proper
workings of their departments but did nothing to remedy it.
172.
These Defendants abandoned the duties of their positions and encouraged
the misconduct.
173.
These Defendants implicitly authorized, approved and knowingly
acquiesced in the unconstitutional conduct of individuals under their control.
The complaint alleges adequate facts against defendants Geskey, Blundell, Mitchell,
Singleton, McMurtry, and Moffet-Massey which demonstrate personal involvement.
These
defendants’ participation in the alleged constitutional violations can be inferred from the conduct
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detailed in the quoted paragraphs. That is not the case for defendant Tierney, however. The
amended complaint merely names him in the caption, and alleges no specifics other than his role as
the UIA’s project manager in paragraph 19. That is not sufficient to state a section 1983 claim
against him. Potter v. Clark, 497 F.2d 1206, 1207 (7th Cir. 1974) (holding that “[w]here a complaint
alleges no specific act or conduct on the part of the defendant and the complaint is silent as to the
defendant except for his name appearing in the caption, the complaint is properly dismissed . . . .”).
3. Procedural Due Process
Each of the defendants assert, in so many words, that the procedural due process claim in
Count 7 fails because the plaintiffs have not exhausted available administrative remedies (mostly
made available to them under the Zynda settlement agreement), and they are not entitled to the
procedures they claim were denied them.
A procedural due process violation is pleaded adequately if the plaintiff plausibly alleges that
(1) he has a life, liberty, or property interest protected by the Constitution; (2) he was deprived of
that interest by a state actor; and (3) he was not afforded timely and adequate process under law.
Waeschle v. Dragovic, 576 F.3d 539, 544 (6th Cir. 2009).
Several courts have recognized that the due process clause applies to termination of
unemployment compensation benefits “because they are statutorily created property interests.” See
Drumright v. Padzieski, 436 F. Supp. 310, 319 (E.D. Mich. 1977). And the amended complaint
alleges the plaintiffs have a property interest in their unemployment benefits, income tax refunds,
and the money they possess generated from sources other than unemployment benefits.
The plaintiffs also have stated clearly that the defendants have taken that property away from
them through the automated system that labeled them fraudsters, and then assessed and collected
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fines and penalties, all without notice and an opportunity to be heard. As noted above, the
allegations are sufficient to support the contention that the private defendants were state actors when
they designed, maintained, operated, or implemented the robo-fraud-detection and adjudication
system.
The amended complaint alleges in sufficient detail the several procedures guaranteed by state
and federal law that the plaintiffs were denied when their unemployment benefits were terminated
and penalties were assessed. Those allegations touch the fundaments of procedural due process
where the state seeks to terminate benefits. “‘The fundamental requisite of due process of law is the
opportunity to be heard.’” Goldberg v. Kelly, 397 U.S. 254, 267 (1970); Grannis v. Ordean, 234
U.S. 385, 394 (1914). “The hearing must be ‘at a meaningful time and in a meaningful manner.’”
Ibid. (quoting Armstrong v. Manzo, 380 U.S. 545, 552 (1965)). The “recipient [must] have timely
and adequate notice detailing the reasons for a proposed termination, and an effective opportunity
to defend by confronting any adverse witnesses and by presenting his own arguments and evidence
orally.” Id. at 267-68.
Those basics are replicated in the applicable federal statutes. Like other state agencies that
administer unemployment benefits, the UIA receives federal funds through the Department of Labor
in support of its program. These federal grants are conditioned on Michigan’s provision of minimum
due process requirements to its beneficiaries, including the “[o]pportunity for a fair hearing, before
an impartial tribunal, for all individuals whose claims for unemployment compensation are denied.”
42 U.S.C. § 503(a)(3).
Federal law also governs how the UIA may recover overpayments made to beneficiaries. In
pursuing a fraudulent claim, the UIA is permitted under 42 U.S.C. § 503(g)(1) to account for
-26-
overpayment in future benefit disbursements, once again, though, subject to notice and opportunity
to be heard requirements. The UIA is also permitted under 26 U.S.C. § 6402(f)(3) to intercept
federal income tax refunds as a means of recovering overpayments and penalties, also subject to
certain notice and hearing requirements. Section 6402(f)(3) requires states to:
a.
Notify the person owing the covered unemployment compensation debt that the State
proposes to take action pursuant to this section;
b.
Provide such person at least 60 days to present evidence that all or part of such
liability is not legally enforceable or is not a covered unemployment
compensation debt;
c.
Consider any evidence presented by such person and determine that an amount of
such debt is legally enforceable and is covered unemployment compensation debt;
and
d.
Satisfy such other conditions as the Secretary may prescribe to ensure that the
determination made under subparagraph (c) is valid and that the State has made
reasonable efforts to obtain payment of such covered unemployment compensation
debt.
Ibid. These statutory requirements apply to three types of unemployment compensation debt,
including overpayment induced by fraud and the resulting penalties and interest assessed, 26 U.S.C.
§ 6402(f)(4)(A),(C), and must be afforded to all claimants, regardless of the State’s ultimate
resolution of the claim.
The plaintiffs have alleged that they were denied these basic procedural guarantees before
their unemployment benefits were terminated and penalties were assessed.
The defendants concede that the plaintiffs possess a property interest in their unemployment
benefits, and only the State defendants cursorily challenge the plaintiffs’ rights to pre-deprivation
hearings, which is irrelevant at this stage of the proceedings. Instead, all four sets of defendants rest
their argument on the plaintiffs’ failure to exhaust administrative remedies. But plaintiffs alleging
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a procedural due process violation are not required to exhaust state remedies. Jefferson v. Jefferson
County Public School System, 360 F.3d 583, 588 (6th Cir. 2004). They are only required to
demonstrate why state procedures are inadequate. Id. at 587 (noting that a “[p]laintiff may not seek
relief under Section 1983 without first pleading and proving the inadequacy of state or administrative
processes and remedies to redress her due process violations”) (citing Parratt v. Taylor, 451 U.S.
527 (1981), overruled on other grounds, Daniels v. Williams, 474 U.S. 327 (1986)); see also Marino
v. Ameruso, 837 F.2d 45, 47 (2d Cir. 1988) (“Although one need not exhaust state remedies before
bringing a Section 1983 action claiming a violation of procedural due process, one must nevertheless
prove as an element of that claim that state procedural remedies are inadequate.”).
The complaint alleges that the automated system afforded no pre-deprivation process to the
plaintiffs even though it was required by state law, and post-deprivation remedies were inadequate
because the decision-making process lacks transparency and access to records to determine the basis
for the determination.
The complaint also indicates the appeals process was fraught with
impropriety.
The amended complaint adequately pleads a federal claim based on a denial of procedural
rights under the Fourteenth Amendment.
4. Substantive Due Process
The substantive due process count cannot withstand the defendants’ challenges to it.
The right to substantive due process prohibits the government from infringing on
“fundamental rights” without sufficient justification. Washington v. Glucksberg, 521 U.S. 702, 720
(1997). “To state a cognizable substantive due process claim, the plaintiff must allege ‘conduct
intended to injure in some way unjustifiable by any government interest’ and that is
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‘conscience-shocking’ in nature.” Mitchell v. McNeil, 487 F.3d 374, 377 (6th Cir. 2007) (quoting
County of Sacramento v. Lewis, 523 U.S. 833, 849 (1998)). “What seems to be required is an
intentional infliction of injury . . . or some other governmental action that is ‘arbitrary in the
constitutional sense.’” Stemler v. City of Florence, 126 F.3d 856, 869 (6th Cir. 1997) (quoting
Lewellen v. Metro. Gov’t of Nashville & Davidson County, 34 F.3d 345, 351 (6th Cir. 1994)).
However, substantive due process protects only against state action that is not otherwise
proscribed by the plain text of other constitutional amendments. See Ciminillo v. Streicher, 434 F.3d
461, 465 (6th Cir. 2006) (reasoning that “[a]lleged conduct that does not implicate a constitutional
right protected by another amendment will be analyzed under the substantive due process component
of the Fourteenth Amendment”). Where a plaintiff has recourse to an “explicit textual source of
constitutional protection,” Graham v. Connor, 490 U.S. 386, 395 (1989), a more general claim of
substantive due process is not available. See Lewis, 523 U.S. at 842.
The Sixth Circuit has noted there is no fundamental right to state-created benefits, including
unemployment compensation. Valot v. Southeast Local School Dist. Bd. of Educ., 107 F.3d 1220,
1233 (6th Cir. 1997) (Ryan, J., concurring) (“[S]tate-created employment benefits, such as
unemployment compensation or the right to a government pension, are not ‘fundamental’ rights
created by the Constitution, and therefore they do not enjoy substantive due process protection.”).
The court in Valot also explained that it is the “procedural component of the Due Process Clause,
rather than the substantive component, which provides protection from arbitrary government
actions.” Ibid. (citing Howard v. Grinage, 82 F.3d 1343, 1349-50 (6th Cir. 1996)). “Substantive
due process refers to government actions that cannot be undertaken regardless of the procedures
used.” Ibid. (citations omitted).
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The plaintiffs attempt to clarify in their response briefs that their substantive due process
claim is based on something more than denial of unemployment benefits. They say the defendants
engaged in egregious conduct when they persisted in using MiDAS even after realizing its
deficiencies and assessed hefty penalties on claimants. And that conduct, they say, was “arbitrary
and capricious,” and it “shocked the conscience.” But at its core, the claim is focused on the loss
of benefits, and the assessment of related penalties. And as noted, there is no fundamental right to
unemployment benefits. Valot, 107 F.3d at 1233.
The plaintiffs have not distinguished this claim from a procedural due process violation. Like
the plaintiffs in Valot, “their claim has to be that some arbitrary conduct in this case deprived them
of ‘procedural’ due process.” 107 F.3d at 1233. “[T]he nonarbitrary “process” guaranteed by the
Due Process Clause is process suitable to vindicate the denial of an identifiable life, liberty, or
property interest.” Ibid. The substantive due process claim in Count 9 will be dismissed.
5. Equal Protection
The defendants contend that the equal protection claim in Count 8 must be dismissed because
the plaintiffs have not alleged any unequal treatment. However, the plaintiffs have alleged that they
were subject to disparate treatment as compared to other similarly situated claimants because of the
“robo-adjudications.” They have alleged a plausible claim for an equal protection violation.
The essence of such a claim is an allegation that a state actor treated the plaintiff differently
than others who were similarly situated without proper justification. Ctr. for Bio-Ethical Reform,
Inc. v. Napolitano, 648 F.3d 365, 379 (6th Cir. 2011) The disparate treatment may be unlawful
because it “‘either burdens a fundamental right, targets a suspect class, or has no rational basis.’”
-30-
Ibid. (citing Club Italia Soccer & Sports Org., Inc. v. Charter Twp. of Shelby, Mich., 470 F.3d 286,
299 (6th Cir. 2006).
If, as here, no fundamental right or suspect class is implicated, the plaintiff “bear[s] the
burden of establishing that the [state’s] policy ‘is not rationally related to any legitimate public
interest.’” In re City of Detroit, Mich., 841 F.3d 684, 701 (6th Cir. 2016) (quoting Ondo v. City of
Cleveland, 795 F.3d 597, 608 (6th Cir. 2015)). As the Sixth Circuit has observed, however, this is
not an easy task. Ibid. The State’s classifications enjoy a presumption of constitutionality. Heller
v. Doe, 509 U.S. 312, 320 (1993). It is up to the plaintiff to establish that there is no “rational
relationship between the disparity of treatment and some legitimate government purpose.” Ibid.
Therefore, “‘[t]o survive a motion to dismiss’ in the rational basis context, ‘a plaintiff must allege
facts sufficient to overcome the presumption of rationality that applies to government
classifications.’” In re City of Detroit, Mich., 841 F.3d at 701 (quoting Wroblewski v. City of
Washburn, 965 F.2d 452, 460 (7th Cir. 1992)).
The amended complaint states that the plaintiffs are claimants who were affected by the
defendants’ practices. They suggest that other similarly situated lawful claimants were not affected.
These plaintiffs were subject to a process that flagged them as potentially fraudulent claimants,
where there was no subsequent confirmation that the classification was warranted. The plaintiffs
also allege that the practices were arbitrary and not rationally related to administering benefits for
the welfare of the State’s citizens. The amended complaint indicates that all claimants whose
accounts were flagged by a defective computerized system were subject to an automated fraud
determination that lacked any human oversight. The plaintiffs describe in sufficient detail how these
fraud determinations were made without any factual basis or legitimate investigation by the UIA.
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There is no conceivable rational basis for terminating benefits based on a defective system and
continuing to do so even after discovering the defect. In alleging a complete failure by the UIA to
evaluate and correct deficiencies in its system, the plaintiffs have satisfied their burden of showing
the State lacked a rational basis for its actions.
The State defendants additionally argue that the plaintiffs have failed to show intentional
discrimination required for a plausible equal protection claim. However, it can be inferred from the
amended complaint that the defendants purposefully designed and implemented the software and
other practices that accompanied the automated system to execute the fraud detection process.
Moreover, they continued to use the automated system even after problems were identified.
Therefore, the amended complaint alleges sufficient facts to show disparate treatment of similarly
situated persons that is intentional and arbitrary, devoid of any rational basis.
6. Fourth Amendment Violation
The plaintiffs allege in Count 11 that the diversion of their income tax refunds, wages, and
unemployment benefits in which they had a possessory interest constituted an unlawful seizure under
the Fourth Amendment. The defendants argue that this claim lacks factual support.
The Fourth Amendment states that “the ‘right of the people to be secure in their persons,
houses, papers, and effects, against unreasonable searches and seizures, shall not be violated,’” and
its protection applies in the civil context. Soldal v. Cook Cnty., III., 506 U.S. 56, 61-67 (1992).
“Property is seized ‘when there is some meaningful interference with an individual’s possessory
interests in that property.” Hensley v. Gassman, 693 F.3d 681, 688 (6th Cir. 2012) (quoting Soldal,
506 U.S. at 61).
“A constitutional violation occurs only where the seizure is objectively
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unreasonable . . ., a determination that entails a ‘careful balancing of governmental and private
interests.’” Ibid. (quoting Soldal, 506 U.S. at 71).
In Zynda v. Arwood, the Court explained that government seizures of property to satisfy a
fine or a debt could offend both the Due Process Clause and the Fourth Amendment’s reasonableness
requirement. 175 F. Supp. 3d at 811-12 (citing G.M. Leasing Corp. v. United States, 429 U.S. 338,
352 n.18 (1977)). And the Court held that “[b]ecause the Fourth Amendment does govern the
seizure of property in satisfaction of a debt owed to the government, dismissal of these claims, at this
stage of litigation, would not be appropriate.” 175 F. Supp. 3d at 812.
Here, the plaintiffs plausibly have alleged a Fourth Amendment claim. They allege that the
defendants together designed, implemented, and maintained an automated system that caused a
meaningful interference with plaintiffs’ possessory interests in their tax refunds, wages, and
unemployment benefits, which was unreasonable under the Fourth Amendment. SAS Institute,
FAST Enterprises, and CSG Government Solutions argue the amended complaint fails to plead facts
that demonstrate that these entities participated in the seizure of any property. However, by alleging
several times that the defendants were involved in implementing and maintaining the defective
system that authorized the termination of benefits, assessment of penalties, interception of tax
refunds — all without human intervention — the plaintiffs have pleaded facts that suggest the
defendants participated in an unreasonable seizure of property under color of law. Additionally, the
amended complaint also alleges specific conduct the State defendants engaged in that ultimately led
to the UIA designating the plaintiffs’ claims as fraudulent and demanding payment from these
individuals. At this stage of the proceedings, it would be inappropriate to dismiss this claim.
7. 26 U.S.C. § 6402
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In Count 12, the plaintiffs allege that the defendants violated the procedural guarantees set
out in 26 U.S.C. § 6402(f)(3), which governs the diversion of tax refunds to satisfy a debt to a state
unemployment compensation system. The defendants argue that the Court has no “jurisdiction” over
a claim under that statute, and even if it did, the only entity that would be subject to the statute would
be the one that effected the seizure: non-party UIA.
Section 6402(f) of the Internal Revenue Code governs the practice of a State seizing income
tax refunds to satisfy unemployment compensation debts. The provision requires the Treasury
Secretary, upon receiving notice from a State, to offset covered unemployment compensation debt
by reducing any overpayments payable to the debtor.
26 U.S.C. § 6402(f)(1).
Covered
unemployment compensation debt includes “past-due debt for erroneous payment of unemployment
compensation due to fraud or the person’s failure to report earnings which has become final under
the law of a State” and “any penalties and interest assessed on such debt.” 26 U.S.C. §
6402(f)(4)(A), (C). Additionally, section 6402(f)(3) requires States to notify debtors that the State
intends to take action, give debtors 60 days to present evidence, and consider any evidence presented
before taking action.
Section 6402(g) also limits judicial review of certain aspects of the diversion procedures. For
instance, no federal court “shall have jurisdiction to hear any action, whether legal or equitable,
brought to restrain or review a reduction authorized by [this statute].”
26 U.S.C. § 6402(g).
However, that bar “does not preclude any legal, equitable, or administrative action against the
Federal agency or State to which the amount of such reduction was paid or any such action against
the Commissioner of Social Security which is otherwise available with respect to recoveries of
overpayments of benefits under section 204 of the Social Security Act.” Ibid.
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That means that although Congress expressly limited federal court jurisdiction over
challenges to offsets, it “reserve[d] plaintiff’s ability to sue agency-claimants directly.” Dasisa v.
Dep’t of Treasury, 951 F. Supp. 2d 45, 46 (D.D.C. 2013). To pursue a such a claim, “the plaintiff
must sue the agency claiming his debt and not the debt collector.” Ibid. At least one court had
suggested that this provision permits an action against the recipient state agency in state court. See
Hicks v. United States, 130 Fed. Cl. 222, 231 (2017) (noting that “nothing in 26 U.S.C. § 6402
prevents [the plaintiff] from filing suit in California state court against the state of California in order
to recover the amounts that have been deducted from his refunds.”).
Here, the pertinent question is whether section 6402 furnishes a basis for a private right of
action that can be enforced through 42 U.S.C. § 1983. That statute does not itself create federal
rights, but only provides judicial relief for the violation of rights arising under the Constitution or
laws of the United States. Baker v. McCollan, 443 U.S. 137, 144 n.3 (1979). The key that
determines whether legislation can be enforced privately is “whether or not Congress intended to
confer individual rights upon a class of beneficiaries.” Gonzaga Univ. v. Doe, 536 U.S. 273, 285
(2002).
In Gonzaga University, the Supreme Court acknowledged that confusion may have resulted
from the conflation of its cases dealing with whether a statute created an implied private right of
action, and those cases determining whether there were private rights enforceable under section 1983
itself. The Court held, however, that “in either case we must first determine whether Congress
intended to create a federal right.” Id. at 283 (emphasis omitted). “For a statute to create such
private rights, its text must be ‘phrased in terms of the persons benefitted.’” Id. at 284 (citing Cannon
v. Univ. of Chicago, 441 U.S. 677, 692 n.13 (1979)). The statute unambiguously must confer
-35-
“rights,” not merely “benefits.” Id. at 283. “[I]f Congress wishes to create new rights enforceable
under § 1983, it must do so in clear and unambiguous terms.” Id. at 290. “[W]here the text and
structure of a statute provide no indication that Congress intends to create new individual rights,
there is no basis for a private suit, whether under § 1983 or under an implied right of action.” Id. at
286.
The Sixth Circuit articulated a three-factor test for answering the question in Harris v.
Olszewski, 442 F.3d 456 (6th Cir. 2006):
First, Congress must have intended that the provision in question benefit the plaintiff.
In answering this initial inquiry, courts look for a statutory right or individual
entitlement, that is unambiguously conferred, by the use of rights-creating language.
An aggregate focus unconcerned with whether the needs of any particular person
have been satisfied is insufficient; the statute must be phrased in terms of the persons
benefitted, and use individually focused terminology. Second, the plaintiff must
demonstrate that the right assertedly protected by the statute is not so vague and
amorphous that its enforcement would strain judicial competence. Third, the statute
must unambiguously impose a binding obligation on the States. In other words, the
provision giving rise to the asserted right must be couched in mandatory, rather than
precatory, terms.
442 F.3d at 461 (quotation marks and citations omitted). If a plaintiff can make these three
showings, “a rebuttable presumption [arises] that the right is enforceable under § 1983,” ibid.
(quoting City of Rancho Palos Verdes v. Abrams, 544 U.S. 113, 120 (2005)), which the defendant
can defeat by showing that the statute’s comprehensive enforcement scheme is incompatible with
individual enforcement.
Nothing in section 6402 generally, or subsections (f) or (g) particularly, confers a right upon
a taxpayer to sue for the wrongful diversion of his or her tax refund. Subsection (g) explicitly forbids
federal court review of the propriety of the diversion. At the same time, however, the statute makes
clear that Congress did not intend to immunize the demanding State or its minions from suits by
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taxpayers to recover wrongfully-seized refunds. To be sure, subsection (f) prescribes notice and
hearing obligations on the State, which can be said to establish minimum due process requirements
the State must afford the taxpayer before it can resort to diversion of tax refunds. Those obligations
plainly are binding on the State. Looking only at subsection (f), one might infer that furnishing those
procedural protections approaches “rights-creating language.” But that inference is negated by
subsection (g)’s divestment of the power to review the diversion. The State can be sued for
wrongfully seizing a taxpayer’s refund, but authority for that suit will be not found in section 6402;
the taxpayer must look elsewhere for his legal theory, as the plaintiffs successfully have done in their
amended complaint.
Section 6402 does not prevent a “legal, equitable, or administrative action against the . . .
State” for wrongful diversion income tax refunds. But it does not create a stand-alone cause of
action. Therefore, Count 12 of the amended complaint will be dismissed.
8. Qualified Immunity
a. Contractor Immunity
The UIA-employee defendants and CSG assert that they are entitled to qualified immunity
from the plaintiffs’ federal claims. The UIA defendants, as employees of the State, are entitled to
assert that defense. CSG, as a private contractor, may not necessarily do so, even though it was
acting under color of state law. See Richardson v. McKnight, 521 U.S. 399, 404-12 (1997) (guards
employed by a private prison corporation may not assert qualified immunity); McCullum v. Tepe,
693 F.3d 696, 702-04 (6th Cir. 2012) (a prison psychiatrist employed by a non-profit entity may not
assert qualified immunity); Harrison v. Ash, 539 F.3d 510, 521-25 (6th Cir. 2008) (prison nurses
employed by a private medical provider may not assert qualified immunity); Cooper v. Parrish, 203
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F.3d 937, 952-53 (6th Cir. 2000) (private attorney working alongside a prosecutor may not assert
qualified immunity).
A “fact-intensive analysis” is required, United Pet Supply, 768 F.3d at 479, in which the
Court must answer two questions: “(1) [whether] there was a firmly rooted history of immunity for
similarly situated parties at common law; and (2) whether granting immunity would be consistent
with the history and purpose of § 1983,” McCullum, 693 F.3d at 700. CSG has not attempted to
answer either of these questions or to develop the argument at any length. The case law suggests a
negative answer to both questions.
The Sixth Circuit has extended qualified immunity to employees of private contractors in
only a few instances. See Brentwood Acad. v. Tenn. Secondary Sch. Athletic Ass’n, 442 F.3d 410,
438-40 (6th Cir. 2006), rev’d on other grounds, 551 U.S. 291 (2007), (executive director of a private
high school athletics association may assert qualified immunity); Cullinan v. Abramson, 128 F.3d
301, 310-11 (6th Cir. 1997) (private attorneys serving as outside counsel to a city may assert
qualified immunity); Bartell v. Lohiser, 215 F.3d 550, 556-57 (6th Cir. 2000) (employees of a
private foster-care agency may assert qualified immunity). In Brentwood, the court gave little
consideration to the first inquiry, explaining that “[t]he notion that there would be such a ‘firmly
rooted’ history . . . is unreasonable in the first place, considering that athletic associations like the
TSSAA have only recently grown in importance and stature, and litigation involving such
associations has been relatively rare.” Id. at 439. In addressing the second inquiry, the court noted
that the purposes of qualified immunity were not already served by “marketplace pressures” because
the TSSAA “does not have to compete with other firms for the job it does on behalf of the state.”
Ibid.
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CSG has not pointed to any cases supporting “firmly rooted history” of conferring qualified
immunity upon private government contractors, who compete in the marketplace for outsourced
business. Because “private actors are not automatically immune,” Richardson, 521 U.S. at 412, it
is the defendant that bears the initial burden of establishing eligibility to assert the defense, Forrester
v. White, 484 U.S. 219, 224 (1988) (“Officials who seek exemption from personal liability have the
burden of showing that such an exemption is justified.”).
That does not end the inquiry. United Pet Supply, 768 F.3d at 480 (observing that “the
absence of a ‘“firmly rooted” history’ of immunity does not preclude eligibility for qualified
immunity”).
An answer to the second question “hinges on three of § 1983’s goals: (1) protecting the
public from unwarranted timidity on the part of public officials; (2) ensur[ing] that talented
candidates were not deterred by the threat of damages suits from entering public service; . . . and
(3) guarding against the distraction from job duties that lawsuits inevitably create.” McCullum, 693
F.3d at 704 (internal quotation marks and citations omitted). These factors do not favor CSG here,
mainly because there was no evidence that its services are irreplaceable, and it is “subject to the sort
of market pressures that obviate unwarranted timidity in the absence of qualified immunity.” United
Pet Supply, 768 F.3d at 482. Moreover, CSG appears to have bargained on equal footing with the
UIA, and was free to allocate liability, seek contractual indemnity, and insure over any risk.
CSG is not entitled to assert a qualified immunity defense.
b. UIA Defendants
The UIA employee-defendants insist that the defense compels dismissal of the amended
complaint against them at this early stage of the case. The Court disagrees.
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The doctrine of qualified immunity insulates state actors from liability in close-call
situations. See Saucier v. Katz, 533 U.S. 194, 206 (2001) (explaining that the defense is intended
to protect state actors who must operate along the “hazy border” that divides acceptable from
unreasonable conduct). But that affirmative defense protects government actors performing
discretionary functions from liability for civil damages only when their conduct does “not violate
clearly established statutory or constitutional rights of which a reasonable person would have
known.” Harlow v. Fitzgerald, 457 U.S. 800, 818 (1982). The purpose of the defense is to strike
a balance that “accommodates the tension between permitting litigants to recover damages, which
is often the only realistic avenue for vindication of constitutional guarantees, and the social costs of
such suits, including the expenses of litigation, the diversion of official energy from pressing public
issues, and the deterrence of able citizens from acceptance of public office.” Champion v. Outlook
Nashville, Inc., 380 F.3d 893, 900 (6th Cir. 2004) (quotation marks and citation omitted).
Once the qualified immunity defense is raised, “the plaintiff must show that (1) the defendant
violated a constitutional right and (2) that right was clearly established.” McDonald v. Flake, 814
F.3d 804, 812 (6th Cir. 2016) (citing Quigley v. Tuong Vinh Thai, 707 F.3d 675, 680 (6th Cir.
2013)). The plaintiff must clear both hurdles, but the Court may take up the questions in either order.
Pearson v. Callahan, 555 U.S. 223, 236 (2009) (abrogating in part Saucier, 533 U.S. at 201). The
qualified immunity defense may be raised at any stage of the case. At the motion to dismiss stage,
the Court accepts all of the plaintiff’s well-pleaded allegations as true. Bassett v. Nat’l Collegiate
Athletic Ass’n, 528 F.3d 426, 430 (6th Cir. 2008).
A state official is entitled to qualified immunity if “a reasonable officer could have believed”
that his or her actions were lawful “in light of clearly established law and the information the
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[officer] possessed.” Anderson v. Creighton, 483 U.S. 635, 641 (1987). “[A] ‘reasonable’ belief
could also be a mistaken belief, and the fact that it turned out to be mistaken does not undermine its
reasonableness as considered at the time of the acts.” Davenport v. Causey, 521 F.3d 544, 552 (6th
Cir. 2008) (citing Saucier, 533 U.S. at 205). In other words, “[q]ualified immunity ordinarily applies
unless it is obvious that no reasonably competent official would have concluded that the actions
taken were unlawful.” Chappell v. City of Cleveland, 585 F.3d 901, 907 (6th Cir. 2009).
The UIA employees argue that the plaintiffs have not alleged facts that show that their
constitutional rights were violated. For the reasons stated earlier, that argument does not persuade.
The plaintiffs have stated viable claims for deprivation of their rights to procedural due process,
equal protection, and freedom from unreasonable seizures.
When assessing the clarity with which the constitutional right was established at the time of
the officers’ conduct, courts must guard against defining the right too broadly. Saucier, 533 U.S.
at 201 (emphasizing that “[t]his inquiry . . . must be undertaken in light of the specific context of the
case, not as a broad general proposition”). On the other hand, there need not be “a case directly on
point, [as long as] existing precedent [has] placed the statutory or constitutional question beyond
debate.” Ashcroft v. al-Kidd, 563 U.S. 731, 741 (2011). When there is no case directly on point, the
court must find that definitional sweet spot, since “it defeats the qualified-immunity analysis to
define the right too broadly . . . [and] it defeats the purpose of § 1983 to define the right too
narrowly.” Kent v. Oakland City, 810 F.3d 384, 396 (6th Cir. 2016).
“Each defendant’s liability must be assessed individually based on his [or her] own actions.”
Binay v. Bettendorf, 601 F.3d 640, 650 (6th Cir. 2010). According to the amended complaint, Julie
McMurtry upset established appeal procedures by removing some of the ALJs from hearing fraud
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cases, after some of them raised concerns over the high rate of invalid fraud determinations that were
left uncorrected because of missed deadlines. Steve Geskey, a policy-making supervisor, learned
of the flaws in the MiDAS system, but ordered deputy state attorneys general and other agency
subordinates to continue processing faulty claims and to contest claimants’ protests and appeals. He
was unrelenting in collection activities.
The plaintiffs allege that Doris Mitchell, who was in charge of the UIA’s Friend of the Court
and Bankruptcy Unit, compromised the plaintiffs’ due process rights by undermining their attempts
to discharge MiDAS-generated debts.
She did that by commencing bankruptcy adversary
proceedings based on known invalid fraud determinations. The plaintiffs allege that Shemin
Blundell, as head of the fraud unit, instructed her subordinates, including the claims examiners, to
pursue the invalid fraud charges. Similarly, they allege that Debra Singleton, in her role as head of
the Benefit Overpayment Collection Unit at the Agency, directed her subordinates to pursue
aggressive collection activities (which included tax refund intercepts and wage garnishments), even
when she learned that the error rate for robo-fraud determination exceeded 90%. And Sharon
Moffet-Massey ran the UIA, knew of the flawed MiDAS-based fraud determinations, and
nonetheless continued to push the rights-depriving agency practices.
Despite these allegations, the UIA defendants insist that no pleaded facts show that they were
aware that their conduct would violate a clearly established right stemming from the improper
handling of alleged erroneous fraud determinations, or that such conduct could be unconstitutional.
But it has been settled law for years that unemployment benefits are a property interest protected by
the Due Process Clause, and that terminating such benefits without pre- or post-termination
procedure is unlawful. “[D]ue process requires that a claimant whose unemployment compensation
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benefits are terminated receive an opportunity to be heard.” Taylor v. Steinbacher, No. C83-419,
1989 WL 281904 at *5 (N.D. Ohio May 22, 1989). In Goldberg v. Kelly, 397 U.S. 254 (1970),
where plaintiffs challenged the adequacy of procedures for notice and hearing before termination of
welfare benefits, the Supreme Court declared that “the hearing must be ‘at a meaningful time and
in a meaningful manner.’” Id. at 267 (quoting Armstrong v. Manzo, 380 U.S. 545, 552 (1965)). The
core principles of due process — its essence — is notice and an opportunity to be heard before a
deprivation occurs. As the Court explained, “these principles require that a recipient have timely and
adequate notice detailing the reasons for a proposed termination, and an effective opportunity to
defend by confronting any adverse witnesses and by presenting his own arguments and evidence
orally.” Id. at 267-68. And the Court’s words in Goldberg echo the importance of those rights here:
“These rights are important in cases such as those before us, where recipients have challenged
proposed terminations as resting on incorrect or misleading factual premises or on misapplication
of rules or policies to the facts of particular cases.” Id. at 268.
The demands of the Due Process Clause should have been plain to each of these defendants,
from the simple exercise of measuring their applied robo-adjudication system (as the amended
complaint describes it) against the mandate of 42 U.S.C. § 503(g). A State’s recovery of any
overpayment made to an individual under an unemployment benefit program “shall be made only
in accordance with the same procedures relating to notice and opportunity for a hearing as apply to
the recovery of overpayments of regular unemployment compensation paid by such State.” Ibid.
It follows, then, that if a claimant is not afforded any notice or opportunity to be heard, a clearly
established right has been violated.
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The plaintiffs have alleged that they were not provided with adequate notice, a factual basis
for their fraud determinations, or an opportunity to be heard before an ALJ prior to termination of
their benefits. They allege they were informed of the determination when it was too late, and that
their efforts to present their cases were ignored. The amended complaint also alleges these State
defendants had actual knowledge of a breakdown in the proper workings of their departments but
did nothing to remedy it. The continued deployment of the defective “robo-adjudication” system
deprived claimants of nearly all process they were entitled to under state and federal law.
The plaintiffs have pleaded around the qualified immunity defense at this stage of the case.
C. Jurisdiction
1. Subject-matter Jurisdiction
The State defendants challenge subject-matter jurisdiction, arguing that the plaintiffs do not
have standing under Article III of the Constitution, but the issue does not deserve extensive review
because the plaintiffs have plainly satisfied its requirements. Standing is required in order to confer
subject matter jurisdiction upon federal courts under Article III. It is “the threshold question in every
federal case.” Warth v. Seldin, 422 U.S. 490, 498 (1975). The Supreme Court has stated that the
standing requirement “limits federal court jurisdiction to actual controversies so that the judicial
process is not transformed into ‘a vehicle for the vindication of the value interests of concerned
bystanders.’” Coal Operators & Assocs., Inc. v. Babbitt, 291 F.3d 912, 915-16 (6th Cir. 2002)
(quoting Valley Forge Christian College v. Ams. United for Separation of Church & State, Inc., 454
U.S. 464, 473 (1982)). There are three constitutional requirements for standing. See Vermont
Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 771 (2000); City of Cleveland
v. Ohio, 508 F.3d 827, 835 (6th Cir. 2007). “To establish Article III standing, a litigant must show
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(1) an injury in fact; (2) a causal connection between the injury and the conduct complained of; and
(3) that the injury will likely be redressed by a favorable decision.” Barnes v. City of Cincinnati, 401
F.3d 729, 739 (6th Cir. 2005) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)).
In addition to the constitutional requirements, a plaintiff must also satisfy three prudential
standing requirements. See City of Cleveland, 508 F.3d at 835. First, a plaintiff must “assert his
own legal rights and interests, and cannot rest his claim for relief on the legal rights or interests of
third parties.” Warth, 422 U.S. at 499 (citations omitted). Second, a plaintiff’s claim must be more
than a “generalized grievance” that is pervasively shared by a large class of citizens. Third, in
statutory cases, the plaintiff’s claim must fall within the “zone of interests” regulated by the statute
in question. Ibid. “These additional restrictions enforce the principle that, ‘as a prudential matter,
the plaintiff must be a proper proponent, and the action a proper vehicle, to vindicate the rights
asserted.’” Ibid. (quoting Pestrak v. Ohio Elections Comm’n, 926 F.2d 573, 576 (6th Cir. 1991)).
For the same reasons discussed by the Court in Zynda v. Arwood, it is apparent that the
plaintiffs in this case have standing to sue under Article III. See Zynda, 175 F. Supp. 3d at 803. The
plaintiffs here alleged that they have been subject to the false fraud determinations discussed earlier.
“A litigant can suffer an injury-in-fact from the denial of due process regardless of the effect that
more process would have on the outcome of the particular determination at issue.” Ibid. (citing
Goldberg v. Kelly, 397 U.S. 254, 256 n.2 (1970)). The State defendants’ argument that the plaintiffs
have not identified a causal connection between their conduct and the plaintiffs’ injury is
unpersuasive. The State defendants are agents of the State; the amended complaint alleges that they
implemented the programs that caused injury to the plaintiffs. Taking these allegations as true, the
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State defendants’ actions are fairly traceable to the plaintiffs’ alleged injuries. The same can be said
for the other defendants.
2. Personal Jurisdiction
SAS employee Andrew Phillips argues that he did not have the requisite minimum contacts
with this forum, and therefore the Court cannot exercise personal jurisdiction over him. He also
points out that he has never been served with process in this case. The Court agrees that both
grounds support a dismissal of defendant Phillips for want of personal jurisdiction.
As an initial matter, contrary to the plaintiffs’ position, defendant Phillips did not waive his
right to assert personal jurisdiction in his motion. The pending motion to dismiss is his first Rule
12(b) motion, and he has not otherwise filed a responsive pleading in this case.
It does not appear that service of process has been effectuated on defendant Phillips. SAS
was served process on March 6, 2017, but defendant Phillips was not added as a party to this suit
until the plaintiffs filed their amended complaint on July 7, 2017. A summons was issued then, but
because no record of service upon Phillips can be found, and more than 90 days have elapsed, the
Court “must dismiss the action against him without prejudice.” Fed. R. Civ. P. 4(m).
Service upon SAS does not satisfy the requirement to serve process on an individual
defendant. The Sixth Circuit has explained that when agents of a corporation are sued in their
individual capacity, they must be accorded proper service separate from the service effectuated on
the corporation. See King v. Taylor, 694 F.3d 650, 655 (6th Cir. 2012). It is not enough to serve
process on the corporation if the agent is sued individually, “for without proper service of process
. . . a court may not exercise personal jurisdiction over a named defendant.” Ibid. The complaint
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states that defendant Phillips was a Project Manager for SAS and is sued in his individual capacity.
But because he has not been served with process, all counts against him will be dismissed.
D. State Law Claims
The SAS, FAST, and CSG defendants also argue that the state law claims against them —
based on theories of negligence, breach of warranty, and civil conspiracy — must be dismissed as
a matter of law. Those claims (save the conspiracy claim) attempt to stake out causes of action under
Michigan’s product liability jurisprudence.
1. Negligence Claims
Michigan law recognizes claims for defective products under several theories: (1) negligent
design; (2) negligent manufacture; (3) failure to warn; and (4) breach of an express or implied
warranty. See Sedgwick Ins. v. F.A.B.E. Custom Downstream Sys., Inc., 81 F. Supp. 3d 582, 590
(E.D. Mich. 2015) (citations omitted). The plaintiffs attempt to include most of those theories,
raising five state law claims against SAS Institute and FAST Enterprises: negligent production
(Count 1); breach of implied warranty (Count 2); gross negligence/actual knowledge (Count 3);
breach of express warranty (Count 4); and failure to warn (Count 5). There also is a negligence
claim against CSG (Count 6).
The defendants’ arguments, taken together, posit that they owed no duty to the plaintiffs
under products liability or negligence law because there was no legal relationship with the plaintiffs
that triggered a duty, but if there was, the duty cannot extend to economic loss claims. As a
corollary, they contend that the plaintiffs have not alleged that the defendants’ conduct proximately
caused their claimed injuries.
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Counts 1 through 3, and 5 and 6, posit that the defendants carelessly designed and maintained
a defective automated fraud detection system that yielded inaccurate results, which falsely accused
them of fraud, leading to dire economic consequences, coupled with stress and suffering. These
claims, particularly the claim for negligent “production,” incorporate the separate theories under
Michigan law based on manufacturing defect, design defect, and failure to warn. See Mich. Comp.
Laws § 600.2945(i) (defining “production” as “manufacture, construction, design, formulation,
development of standards, preparation, processing, assembly, inspection, testing, listing, certifying,
warning, instructing, marketing, selling, advertising, packaging, or labeling”). A common thread
among those legal theories is the need to establish that a defendant owed a legal duty to the injured
person. See Hammons v. Icon Health and Fitness, 616 F. Supp. 2d 674, 679, 682-83 (E.D. Mich.
2009 (collecting cases). In Glittenberg v. Doughboy Recreational Industries, for example, the
Michigan Supreme Court reiterated that “[m]anufacturers have a duty to warn purchasers or users
of dangers associated with the intended use or reasonably foreseeable misuse of their products.”
441 Mich. 379, 387, 491 N.W.2d 208, 211 (1992). The court traced the contours of that duty to the
principles laid down in section 388 of the Restatement (Second) of Torts, which states:
One who supplies directly or through a third person a chattel for another to use is
subject to liability to those whom the supplier should expect to use the chattel with
the consent of the other or to be endangered by its probable use, for physical harm
caused by the use of the chattel in the manner for which and by a person for whose
use it is supplied . . . .
Restatement (Second) of Torts § 388 (1965). Plainly, liability for a defective product can be
imposed not only for injuries suffered by users of the defective chattel, but also by “those whom the
supplier should expect . . . to be endangered by its probable use.” Ibid. Whether an injured
bystander falls within that scope generally is determined by foreseeability, augmented by policy
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considerations. See Halbrook v. Honda Motor Co., Ltd., 224 Mich. App. 437, 441, 569 N.W.2d 836,
839 (1997) (citing Moning v. Alfono, 400 Mich. 425, 254 N.W.2d 759 (1977)); see also Colangelo
v. Tau Kappa Epsilon Fraternity, 205 Mich. App. 129, 132, 517 N.W.2d 289, 291 (1994).
The plaintiffs have alleged that the defendants entered into agreements with the UIA to
design and maintain a fraud detection system that ultimately misidentified them as fraudsters, and
adjudicated them as such without recourse. Certainly, those seeking unemployment benefits could
be expected to be injured by such a system, since they were the intended target of the systems which
the defendants produced under their contracts.
The defendants also contend, however, that they cannot be held liable for the plaintiffs’
economic losses under these theories, and noneconomic loss is not recoverable absent physical
injury. The Court agrees.
Although no physical “impact” is required, emotional distress damages may not be recovered
in a tort claim unless “a definite and objective physical injury is produced as a result of emotional
distress proximately caused by defendant’s negligent conduct.” Daley v. LaCroix, 384 Mich. 4, 12,
179 N.W.2d 390, 395 (1970). And for the negligent deprivation or destruction of property, damages
are measured by the market value of the property before and after the injury, or the cost to repair.
Price v. High Pointe Oil Co., 493 Mich. 238, 244, 828 N.W.2d 660, 664 (2013) (citing O’Donnell
v. Oliver Iron Mining Co., 262 Mich. 470, 247 N.W. 720 (1933). Emotional distress damages are
not allowed.
The plaintiffs allege damages consisting of the loss of their benefits, the fines levied, the
seizure of their property, and the economic consequences that followed. They have not alleged that
any of them suffered “a definite and objective physical injury.” They point to a section of
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Michigan’s products liability statute that defines noneconomic loss to include “ pain, suffering,
inconvenience, physical impairment, disfigurement, mental anguish, emotional distress, . . . injury
to reputation, humiliation, or other nonpecuniary damages.” Mich. Comp. Laws § 600.2945(f). But
that does not change the rule that a condition for recovering those damages is a physical injury.
Because the plaintiffs have not alleged damages for which the SAS, FAST, and CSG
defendants can be held accountable under a products liability or negligence theory of recovery,
Counts 1, 3, 5 and 6 will be dismissed.
2. Breach of Warranty
The plaintiffs have not alleged facts to support the idea that they were beneficiaries of any
warranties, either implied or express. With respect to the former, the plaintiffs allege that the
defendants knew or had reason to know the particular purposes for which the software systems were
to be used and that purchasers and users would rely on the defendants’ skill or judgment in
furnishing goods suitable for such purposes and uses. Amended Compl. ¶ 104 (emphasis added).
They allege the MiDAS and EFDS programs were not fit for the particular purposes for which they
were intended and for which they were used. Id. ¶ 105. But they do not allege any facts that indicate
they were purchasers or users of the programs. They also do not allege any facts establishing privity
with the defendants.
On the express warranty claim, the amended complaint alleges that the defendants made
representations or statements that the product was free from defects and/or fit for its intended
purpose. Amended Compl. ¶ 112. Nowhere in the amended complaint do the plaintiffs allege that
the representations were made to them or a suitable proxy. No plausible basis for relief can be
inferred even under a very generous reading of the three-sentence count.
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Counts 2 and 4 also will be dismissed.
3. Civil Conspiracy
The complaint does not clearly indicate whether the plaintiffs allege civil conspiracy under
state or federal law. To show a civil conspiracy to violate 42 U.S.C. § 1983, a plaintiff must
demonstrate that (1) the defendants entered into an agreement to violate the plaintiff's rights; (2) the
defendants shared a general objective to deprive the plaintiff of his rights; and (3) an overt act was
committed in furtherance of the conspiracy to deprive the plaintiff of his civil rights that caused
injury to the plaintiff. Spadafore v. Gardner, 330 F.3d 849, 854 (6th Cir. 2003). However,
“conspiracy claims must be pled with some degree of specificity and . . . vague and conclusory
allegations unsupported by material facts will not be sufficient to state such a claim under § 1983.”
Gutierrez v. Lynch, 826 F.2d 1534, 1539 (6th Cir. 1987). Therefore, when proceeding under 42
U.S.C. § 1983 for civil conspiracy, a plaintiff must make some allegation of coordinated actions
between the alleged conspirators. See Bass v. Robinson, 167 F.3d 1041, 1050 (6th Cir.1999);
Collyer v. Darling, 98 F.3d 211, 229 (6th Cir. 1996). Conclusory, vague accusations that do not
describe some “meeting of the minds” cannot state a claim for relief under 42 U.S.C. § 1983. See
Naguib v. Ill. Dep’t of Prof’l Regulation, 986 F. Supp. 1082, 1092 (N.D. Ill. 1997); Pollack v. Nash,
58 F. Supp. 2d 294, 299–300 (S.D.N.Y.1999).
Under Michigan law, a civil conspiracy is “a combination of two or more persons, [who] by
some concerted action, [agree] to accomplish a criminal or unlawful purpose, or to accomplish a
lawful purpose by unlawful means.” Admiral Ins. Co. v. Columbia Cas. Ins. Co., 194 Mich. App.
300, 313, 486 N.W.2d 351 (1992); see also Ahlers v. Schebil, 188 F.3d 365, 374 (6th Cir. 1999);
Fenestra Inc. v. Gulf American Land Corp., 377 Mich. 565, 593, 141 N.W.2d 36, 48 (1966).
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Although civil conspiracy is a free-standing claim, it “may not exist in the air; rather, it is necessary
to prove a separate, actionable tort.” Early Detection Ctr., PC v. New York Life Ins. Co., 157 Mich.
App. 618, 632, 403 N.W.2d 830, 836 (1986); see also Dauenhauer v. Bank of New York Mellon, 562
F. App’x 473, 483 (6th Cir. 2014); Collins v. Wickersham, 862 F. Supp. 2d 649, 660 (E.D. Mich.
2012).
Therefore, to survive the motion to dismiss, the pleaded facts must show “that there was a
single plan, that the alleged coconspirator shared in the general conspiratorial objective, and that an
overt act was committed in furtherance of the conspiracy that caused injury to the complainant.”
Memphis, Tennessee Area Local, Am. Postal Workers Union, AFL–CIO v. City of Memphis, 361
F.3d 898, 905 (6th Cir. 2004) (quoting Hooks v. Hooks, 771 F.2d 935, 943–44 (6th Cir. 1985)).
The plaintiffs have not adequately pleaded facts to give rise to a claim for civil conspiracy.
In its entirety, Count 13 of the amended complaint states:
199.
There was an agreement between Defendants to curtail or eliminate the
traditional procedural guarantees for an unemployment fraud determination
through the design, implementation, administration, configuration and/or
maintenance of automated system.
200.
Each Defendant, individually or through its agents, agreed with at least one
other Defendant or an unnamed co-conspirator, to accomplish this objective.
201.
Each Defendant has constructive knowledge of the law.
202.
Each Defendant, individually or through its agents, committed at least one
overt act in the design, implementation, configuration, administration and
maintenance of the automated system.
203.
Each Defendant, individually or through its agents, engaged in a civil
conspiracy that deprived Plaintiffs of their rights under the law.
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The amended complaint does not plead sufficient facts under either section 1983 or Michigan
law to survive dismissal. Civil conspiracy requires some degree of specificity in demonstrating that
the defendants entered into an unlawful agreement and committed an overt act in furtherance of the
conspiracy. There are no specifics here, only vague and conclusory allegations. That is not enough.
Gutierrez, 826 F.2d at 1539.
The amended complaint does not describe in any detail when or how a “meeting of the
minds” took place among the 22 defendants or what actions they took in furtherance of the
conspiracy. The plaintiffs seem to argue the amended complaint alleges that the defendants
contracted to perform certain services, which suffices to show an unlawful agreement existed to
eliminate procedural guarantees, and in performing these obligations, the defendants committed at
least one overt act. However, without more detail, the “defendants’ allegedly conspiratorial actions
could equally have been prompted by lawful, independent goals which do not constitute a
conspiracy.” Twombly, 550 U.S. at 566-67 (internal quotation marks and citations omitted). The
lack of specificity with respect to each defendant and the actions they undertook dooms this count.
III. Conclusion
There is no basis to dismiss the amended complaint for failure to join a necessary or
indispensable party. The plaintiffs have not pleaded viable federal claims against the individual
employees of defendants SAS, FAST, and CSG. However, they have alleged sufficient facts to
support a claim of state action against those companies, and have stated viable claims for deprivation
of their rights to procedural due process, equal protection, and freedom from unreasonable seizures
of property, except as to UIA employee defendant Clayton Tierney. They have not stated a claim
for denial of substantive due process, and there is no private right of action under 26 U.S.C. § 6402.
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The plaintiffs concede that their claim for unlawful taking of property under the Fifth Amendment
is not ripe for adjudication. The plaintiffs have not established personal jurisdiction over defendant
Andrew Phillips, but they have shown that they have standing to sue and the Court has subject matter
jurisdiction over the surviving claims. The remaining defendants are not entitled to qualified
immunity. And the plaintiffs have not stated viable claims based on state law.
Accordingly, it is ORDERED that the motions to dismiss by defendants CSG [dkt. #55],
FAST [dkt. #58], SAS [dkt. 61], and the UIA employee defendants [dkt. #104] are GRANTED IN
PART AND DENIED IN PART.
It is further ORDERED that Counts 1 through 6, 9, 10, 12, and 13 of the amended complaint
are DISMISSED WITH PREJUDICE.
It is further ORDERED that the amended complaint is DISMISSED WITH PREJUDICE
IN ITS ENTIRETY as to defendants Jeremy Gragg, Jennifer Tuvell, Kristen Araki-Tokushige,
Mike Patterson, Allison Forgie-McClurg, Richard Staten, Rebecca Rosier, Dana Rowe, Tim Palmer,
Steve Goodhall, Paul Pluta, and Clayton Tierney, only.
It is further ORDERED that the amended complaint is DISMISSED WITHOUT
PREJUDICE IN ITS ENTIRETY as to defendant Andrew Phillips, only.
It is further ORDERED that counsel for the parties appear for a case management conference
on April 3, 2018 at 3:00 p.m.
s/David M. Lawson
DAVID M. LAWSON
United States District Judge
Dated: March 2, 2018
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PROOF OF SERVICE
The undersigned certifies that a copy of the foregoing order was served
upon each attorney or party of record herein by electronic means or
first class U.S. mail on March 2, 2018.
s/Deborah Tofil
DEBORAH TOFIL
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