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Cahoo v. Sas Analytics Inc.

United States District Court, E.D. Michigan, Southern Division

April 23, 2019




         The plaintiffs have filed this putative class action against certain contractors who were involved in designing and implementing an automated fraud detection system brought on line in 2012 by the State of Michigan's Unemployment Insurance Agency (UIA). They also have sued certain functionaries and decisionmakers of the UIA in their individual capacities. The plaintiffs allege that they were accused wrongfully of making fraudulent claims for unemployment benefits, and then had their property confiscated by the State with no notice, all by means of the automated system.

         Defendant FAST Enterprises LLC (FAST) has subpoenaed the plaintiffs' records from the UIA (which are the main focus of the plaintiffs' claims) under Federal Rule of Civil Procedure 45, but the UIA has refused to produce any records. It has filed a motion to quash the subpoena, now before the Court, contending the information sought is privileged, and the burden of producing the information is excessive. The parties argued the motion orally on February 6, 2019, at which time plaintiffs' counsel agreed that none of his clients have asserted or intended to assert a privilege over these records for purposes of this case and would consent to disclosure. The Court allowed the parties and the UIA to file supplemental briefs, which have been received. Finding no merit in the UIA's arguments, the Court will deny the motion to quash the subpoena and order prompt compliance.


         The plaintiffs have alleged that the UIA, with the help of outside contractors SAS Institute Inc., FAST, and CSG Government Solutions, designed and implemented a flawed automated system that examined unemployment compensation claims to detect fraud. The system, known as the Michigan Integrated Data Automated System (MiDAS), searched for discrepancies in the records of unemployment compensation recipients after coordinating collection procedures with employers, other state agencies, and the federal government. MiDAS's electronic “crosschecking” 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.

         A “flag” caused MiDAS to initiate an automated process that 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. The questionnaires were to be shared with claimants via their Michigan Web Account Management System (MiWAM) accounts, but in some instances, the system failed to send the questionnaires, or the questionnaires were sent to dormant MiWAM accounts. And because MiDAS reviewed claims from the six preceding years, questionnaires were sent to claimants whose benefits had expired already. The system did not provide any other means of notifying claimants of the questionnaire's existence. And a claimant received no other notice of the alleged fraud determination. Failure to respond or 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. Other consequences, discussed in other opinions filed in this case, followed. See Cahoo v. SAS Inst. Inc., 322 F.Supp.3d 772, 786-87 (E.D. Mich. 2018), aff'd in part, rev'd in part and remanded sub nom. Cahoo v. SAS Analytics Inc., 912 F.3d 887 (6th Cir. 2019).

         On December 14, 2018, defendant FAST served on the State of Michigan a subpoena seeking certain unemployment compensation records relating to the five named plaintiffs and six other individual claimants identified in the plaintiffs' initial disclosures, all of whom suffered hardships from false robo-fraud determinations by the UIA's automated system. The documents sought are defined as “[a]ll Communications and Documents related to” those individuals, “including all Documents and Communications related to their unemployment claims, adjudications, appeals, and re-adjudications.” FAST also asked for “[a[]ll Communications and Documents related to the Project that were transmitted to the Auditor General.” Subpoena, ECF No.164-2, PageID.4010-11. The request covers the period from January 1, 2012 through the date of response. Id., PageID.4010.

         The UIA refused to produce the requested files and instead filed a motion to quash the subpoena. It contends that Michigan law prohibits it from disclosing any individual's “confidential” unemployment records to private third parties and none of the exceptions to that prohibition apply. See Mich. Comp. Laws § 421.11(b)(1). It also argues that a federal regulation compels the Agency to file a motion to quash to avoid disclosure. See 20 C.F.R. § 603.7(a).


         Unemployment compensation insurance in this country was established as a joint federal-state program by the Social Security Act of 1935. See generally Charles C. Steward Mach. Co. v. Davis, 301 U.S. 548, 574-78 (1937). Under Title IX of the Act, the states are afforded “broad freedom” to design and operate their unemployment insurance programs. New York Tel. Co. v. New York State Dept. of Labor, 440 U.S. 519, 537-40 (1979). But those programs must “satisfy[] certain minimum criteria” to qualify for their share of federal funding. Charles C. Steward Mach. Co., 301 U.S. at 574. One such condition for funding is that the state's program comply with the regulations established by the Secretary of Labor that are “reasonably calculated to insure full payment of unemployment compensation when due.” 42 U.S.C. § 503(a)(1).

         The Department of Labor has interpreted that requirement to mean that state law “must include provision for maintaining the confidentiality of any [unemployment compensation (UC)] information which reveals the name or any identifying particular about any individual or any past or present employer or employing unit, or which could foreseeably be combined with other publicly available information to reveal any such particulars, and must include provision for barring the disclosure of any such information, except as provided in this part.” 20 C.F.R. 603.4(b). Section 421.11 of Michigan's Employment Security Act (MESA) was enacted to ensure that UC information remained confidential under 20 C.F.R. § 603.4. Mich. Comp. Laws § 421.11(a). Section 421.11(b)(1) of that statute declares that UC information from a claimant or employer is “confidential” and not available to the public, with some exceptions. It also states, among other things, that the information “must not be used in any action or proceeding before any court . . . unless the unemployment agency is a party to or a complainant in the action or proceeding, or unless used for the prosecution of fraud, civil proceeding, or other legal proceeding in the programs indicated in subdivision.” Id. § 421.11(b)(1)(iii).

         The UIA filed a motion to quash the subpoena under Federal Rule of Civil Procedure 45(d)(3)(iii) and (iv) for the plaintiffs' and other claimants' UC information. It insists that it is required by law to file that motion (more on that later), and it asks the Court to relieve it of the obligation to comply with the subpoena. Those subsections of the rule require a court to “quash or modify” a subpoena that “requires disclosure of privileged or other protected information, if no exception or waiver applies, ” or if the production “subjects a person to undue burden.” A. Privilege The UIA's privilege argument faces several problems. First, the only privilege identified by the UIA is the state statute. However, the claims in this case arise under federal law, not state law. Therefore, “federal common law determines the extent of the privilege.” Regional Airport Auth. of Louisville v. LFG, LLC, 460 F.3d 697, 712 (6th Cir. 2006); see also Boddie v. Cranston, 181 F.3d 99 (Table) (6th Cir. 1999) (“A federal court considering a 42 U.S.C. § 1983 claim applies the federal common law of privilege.”); Reed v. Baxter, 134 F.3d 351, 355 (6th Cir. 1998) (“Questions of privilege are to be determined by federal common law in federal question cases.”). A privilege created by state law will not prohibit disclosure in a federal action brought under federal law.

         Second, a section in the federal regulations allows disclosure of UC information by a state agency “if authorized by State law and if such disclosure does not interfere with the efficient administration of the State UC law.” 20 C.F.R. § 603.5. But those exceptions, found in subsections (a) through (g), do not govern here (save one) because the information was sought by subpoena in a federal civil action. Ibid. (allowing disclosure “in response to a court order or to an official with subpoena authority”) (referencing 20 C.F.R. § 603.5(h)). Disclosure under ...

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