Michigan Unemployment Insurance False Fraud Determinations

Problem Statement

The Michigan Unemployment Insurance Agency rolled out the Michigan Integrated Data Automated System (MiDAS) in 2013, which was built by contractor Fast Enterprises starting in 2011 for $47 million. During its first two years in use, the system falsely accused 40,000 residents of fraud (a 5-fold increase from expected numbers). A corresponding spike in appeals alarmed advocates. It turned out that the system would flag any data discrepancies as fraud, no matter how trivial, and required followup from the applicant to clarify within 10 days.

MiDAS also took the average of an applicant’s entire income instead of looking at individual paychecks, which led to discrepancies between reported and system-determined income—and more false fraud flagging. Even worse, people filing disputes had to fill out an extremely misleading questionnaire, which was pre-filled with responses that would flag the applicant for fraud. Applicants would receive notices only on the unemployment portal (instead of in the mail), which they had no reason to check if they were no longer receiving benefits. Applicants accused of fraud had their tax refunds seized and wages garnished by the state, all in disproportionately high amounts compared to what they were accused of actually owing.

The Michigan Auditor General reviewed 22,000 MiDAS fraud determinations in 2016 and determined that 93% did not actually involve fraud. Because applicants were not given a real chance to fight fraud determinations, many suffered severe consequences, like having to file for bankruptcy or tarnished credit ratings. In 2015, advocates filed a class-action lawsuit, Bauserman v. Unemployment Insurance Agency, which was initially dismissed by a lower court because plaintiffs waited too long to file. In 2019, the Michigan Supreme Court decided that a state constitutional claim for damages could move forward. And in the 2017 federal court case Cahoo v. SAS Analytics Inc., other advocates sued the state agency, the state agency’s contractor, and several individual agency officials.

Status of Issue

In a 2017 settlement under Zynda, et. al. v. Zimmer et. al., Michigan’s Unemployment agency agreed to stop using MiDAS’s automated functions without human review. The settlement also made the agency reverse and refund certain fraud determinations. The Michigan Legislature also passed a set of bills in 2017 which lessen fraud penalties and prevent certain consequences if administrative errors caused the fraud allegations. Many claimants are still working on getting refunds and damages paid back to them.

In October 2022, the parties settled Bauserman v. Unemployment Insurance Agency for $20 million. In July of 2022, the Michigan Supreme Court ruled that more than 3,000 Michiganders wrongfully accused of fraud by auto-determinations from 2013-2015 could seek financial relief—holding that plaintiffs can recover monetary damages for their constitutional-tort claim where the agency intercepted their state and federal tax refunds, garnished their wages, and forced them to repay unemployment benefits that they had lawfully received. The state Court of Claims issued a final order in January 2024, ending nine years of litigation; lawsuit class members received settlement checks in early 2024.

And in 2023, the Sixth Circuit Court of Appeals reversed the lower court’s decision in Cahoo v. SAS Analytics that had denied qualified immunity to the agency officials named in the suit. The appeals court cited the extensive discovery that had occurred and concluded that discovery changed the nature of the case to one about collection of paid benefits. Although the court acknowledged the multitude of problems with the MiDAS program, it found that the remaining claims were about an internal fraud red flag, which did not deprive benefits at that point without additional process, notice, and opportunities for appeal. The Sixth Circuit also ruled the agency officials do have qualified immunity because of the lack of evidence showing the connection between the officials and defects with pre-deprivation processes. A dissenting opinion said there were questions of fact about the protections that individuals were afforded as well as the role of state officials in the decision-making, and would not have reversed the District Court’s decisions to deny qualified immunity and set the case for jury trial.

Links to More Information

2017 Bills: Gov. Rick Snyder signs bipartisan bills modernizing Unemployment Insurance Agency system - Michigan.gov

Michigan may pay victims of unemployment benefits blunder - Daily Press

States’ Automated Systems Are Trapping Citizens in Bureaucratic Nightmares With Their Lives on the Line - TIME Magazine

Thousands of unemployed in Michigan wrongly accused of fraud can seek cash from state - Detroit Free Press

Cahoo v. SAS Analytics Inc., No. 18-1296 (6th Cir. 2019) and No. 21-2672 (6th Cir. 2023)

Bauserman v. Unemployment Insurance Agency

Michiganders falsely accused of jobless fraud to share in $20M settlement - Bridge Michigan, January 30, 2024

Zynda, et. al. v. Zimmer et. al. settlement

AI Now Institute - Litigating Algorithms 2019 US Report Session 3: Public Benefits and Collateral Consequences

Undark - Government’s Use of Algorithm Serves Up False Fraud Charges