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Federal Trade Commission v. Bf Labs Inc.

United States District Court, W.D. Missouri, Western Division

December 12, 2014

FEDERAL TRADE COMMISSION, Plaintiff,
v.
BF LABS INC., et al., Defendants.

ORDER

BRIAN C. WIMES, District Judge.

Plaintiff contends Defendants violated Section 5(a) of the Federal Trade Commission Act ("FTC Act") by misrepresenting material facts about their Bitcoin mining machines.[1] Plaintiff moves for a preliminary injunction, asset freeze, appointment of a receiver, and other equitable relief. Defendants oppose the motion. After reviewing the premises, the record, and the applicable law, the Court denies Plaintiff's motion.

I. BACKGROUND

A. DEFENDANTS

BF Labs, Inc., d/b/a Butterfly Labs ("BFL") is a Wyoming corporation that was formed in July 2011 and has its principal place of business in Johnson County, Kansas. It manufactures and sells Bitcoin[2] mining machines including the BitForce and Monarch. BFL additionally offers a cloud mining service that utilizes its Monarch machines.

Sonny Vleisides is a co-founder, majority owner, Innovation Officer, Vice President, and Director of BFL. Darla Jo Drake holds multiple roles at BFL including Secretary, Treasurer, and General Manager. Nasser Ghoseiri co-founded and co-owns BFL. He holds several positions at the company including CEO, President, Innovation Officer, Chief Technology Officer, and Director.

B. PRODUCTS AND SERVICES

BFL markets its mining machines and services on its website, www.butterflylabs.com. In June 2012, BFL began selling BitForce. BFL required customers to pay the entire cost of the machine upfront, which ranged from $149.00 to $29, 899.00 depending on the machine's processing power. The website stated that "[i]nitial product delivery is scheduled for October, 2012." Doc. #8-1 at 81. BFL revised the shipping date several times and did not ship any machines until April 2013. By September 2013, more than 20, 000 orders remained backlogged.

In August 2013, despite the BitForce backlog, BFL began soliciting orders for Monarch. It again required purchasers to pay the entire cost of the machine upfront - up to $4, 680.00. The website indicated that initial shipments would occur by the end of 2013 and bulk shipping would occur in early 2014. BFL revised the shipping date multiple times over the next several months and ultimately began shipping Monarch machines in August 2014.

In December 2013, BFL began offering 12-month mining service contracts at an average cost of $10/GH, which consumers had to pay upfront. Under these contracts, BFL offered to use Monarch machines to mine on a consumer's behalf. The website stated that BFL would begin generating bitcoins for consumers in the March 2014 time frame. In June 2014, BFL told consumers that it would begin services later that month. By September, BFL had not started providing these services.

C. BITCOIN CALCULATOR

In addition to its website, BFL also markets its products and services on Facebook. In 2012, BFL posted a link on its Facebook page to a calculator that allowed consumers to calculate their return on investment ("ROI"). BFL's Facebook post told consumers to "measure your ROI with this cool Bitcoin mining calculator." Doc. #8-1 at 15. BFL did not create the calculator, and the calculator required consumers to input various data points including the Bitcoin exchange rate, mining difficulty, and delivery date. The calculator then determined the profitability of a Bitcoin mining machine.

D. PROCEDURAL HISTORY

On September 15, 2014, Plaintiff filed this action under Section 13(b) and 19 of the FTC Act seeking injunctive and other equitable relief. Plaintiff alleges Defendants violated Section 5(a) of the FTC Act by falsely representing that (1) "[c]onsumers will be able to use the machines or services to generate Bitcoins, or to generate a profitable or substantial amount of Bitcoins, " or (2) "Defendants will deliver Bitcoin mining machines or services to consumers in a timely fashion." Doc. #2 at 10.

Along with its complaint, Plaintiff filed a motion for ex parte temporary restraining order with asset freeze, appointment of a receiver, and other equitable relief. The Court granted the ex parte motion and scheduled a hearing. On September 29, 2014, the parties appeared for the hearing and thereafter negotiated a Stipulated Interim Order, which the Court subsequently entered. The Stipulated Interim Order provides for limited discovery and set deadlines for the exchange of additional evidence in advance of a rescheduled preliminary injunction hearing. The Court held the preliminary injunction hearing on November 24 and 25, 2014. It heard live testimony and received evidence and argument.[3] The Court also accepted post-hearing briefs.

II. ANALYSIS

Section 13(b) of the FTC Act authorizes Plaintiff to bring suit in district court to enjoin violations of any provision of law enforced by it upon a reasonable belief "that any person, partnership, or corporation is violating, or about to violate, " such law. 15 U.S.C. ยง 53(b). Under this statute, the court may grant a preliminary injunction "[u]pon proper showing that, weighing the equities and considering the [FTC's] likelihood of ultimate success, such action would be in the public interest." Id . Thus, the Court must (1) determine the likelihood that Plaintiff will ultimately succeed on the merits, and (2) balance the competing equities. Id .; FTC v. Freeman Hosp., 6 ...


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