Bitcoin operator asks court to dismiss Federal Trade Commission case

Butterfly Labs Inc., the bitcoin equipment seller in Overland Park, has asked a federal judge to dismiss the government’s case against it on legal grounds.

The Federal Trade Commission had succeeded, through sealed court filings in September, in getting control of the company placed in the hands of a court-appointed receiver.

Regulators alleged that Butterfly Labs took money from 20,000 consumers without shipping the computers they ordered, or delivered worthless equipment. The FTC has said consumers were taken for between $20 million and $50 million.

The company’s court filings on Friday said the FTC failed to make a claim “on which relief can be granted.” Specifically, it said Butterfly Labs had stopped its “pre-order sales” business in mid-July so it no longer accepted money with a promise to deliver equipment.

Officials with the FTC were not available Monday, which was a federal holiday.

Prompted by a federal judge, the company and FTC agreed on terms that allowed Butterfly Labs to resume limited business, though the company has said it is less than it had hoped for. In a statement Monday, the company said it continues to work with the receiver to resume its operations.

Butterfly Labs’ equipment allows buyers to earn or mine bitcoin, a virtual currency that is increasingly accepted by retailers and others just at they accept dollars for payment. One bitcoin as of Monday was worth about $385, though its value has changed dramatically over time.

The court filings echoed Butterfly Lab’s early complaint that the FTC action was “heavy-handed” by saying the agency has engaged in a “campaign to destroy” the company.

Its filings further complained that the FTC “has tried to justify its case through self-serving, selective use of evidence.” Specifically, the federal agency “cherry-picked” information from Butterfly Labs’ website and online postings, one filing said.

The posted information, the filings said, is “simply not material or misleading as a matter of law.”

Attorneys for the company also argued in the filings that the postings kept consumers informed and “show a pattern of consistently updated shipping projections, increasingly detailed production updates, and day-by-day shipping updates.”

A selection of posts included in the filings followed the development and delivery problems of Butterfly Labs’ BitForce SC products.

For example, a post explained in early October 2012 that delivery would have to wait until November. By the end of October, the posted word was that the November shipping date wasn’t going to happen.

Then, the machine was “in final stage development with initial shipping scheduled for the last half of February 2013,” one filing said, quoting a company posting online.

New posts in March 2013 explained continuing problems. April posts, noted in the filing, carried news that “products are in final stage development with initial shipping scheduled for the last half of April 2013,” and said that “We have orders that date back to June of 2012.”

On June 14, 2013, Bitcoin’s Darla Jo “Jody” Drake posted, according to the filing:

“I said complaining doesn’t help because we can’t ship any faster just because we hear that you are not happy about it. Do you think we are sitting around BFL with shelves full of miners until we get an email that says, ‘Darn it, I am upset because you haven’t shipped’? Our lives would be different if all the miners were shipped, but the reality is, they are not all shipped yet, but we are doing our best to change that.”

Attorneys, in the filings, said the reality was that Butterfly Labs “took far longer” than it expected to develop machines but that the company’s “representations, in context and fairly considered — were not materially misleading.”

“And to any further extent, no reasonable consumer could read BF (Butterfly) Labs’ updates to suggest anything more than what would eventually prove to be true: that the wait for BF Labs’ much-anticipated products would continue a bit longer still,” the filing said.

This story was originally published October 13, 2014 at 5:15 PM with the headline "Bitcoin operator asks court to dismiss Federal Trade Commission case."