The lawsuit accuses former Fargo Police detective Lucas Heck of relying on a facial recognition lead without doing enough to verify whether Lipps was actually the woman involved in the fraud.
It also alleges the city failed to have adequate policies, training or supervision governing officers' use of facial recognition technology at the time.
Then-Fargo Police Chief Dave Zibolski said detectives had wrongly assumed bank surveillance photographs had also been submitted for facial recognition analysis when they had not.
Watch below: Lipps' case drew renewed attention after she filed a $10 million lawsuit over the arrest and months she spent behind bars.
Fargo later tightened its facial recognition rules, including requiring supervisory review and limiting searches to approved state or federal entities.