Court win puts bitcoin equipment seller back in business

Butterfly Labs, the bitcoin mining equipment company in Overland Park that was shut down under a federal complaint, will be reopening for business under a judge’s order.

U.S. District Judge Brian C. Wimes had shuttered Butterfly Labs in September after the Federal Trade Commission charged the company had taken millions of dollars from thousands of customers for computer equipment it failed to deliver.

Butterfly Labs has had limited operations since then under the control of a court-appointed receiver. The receiver’s role will be ending with the order returning control to management at Butterfly Labs.

“They’re going to be back in business,” said Michael Foster, an attorney at the Polsinelli law firm representing Butterfly Labs. “The receivership is going away.”

FTC officials involved in the case were not available Monday, but a spokesman issued a statement.

“We plan to continue our litigation in this matter and will move forward with this effort to protect consumers,” Jay Mayfield, in the agency’s office of public affairs, said in an email.

Bitcoin mining equipment consists of highly specialized computers that tackle complex algorithms. Success earns the equipment owners bitcoins, a digital currency that some see as an alternative to money backed by a government.

Bitcoins can be used online and in some shops to buy a myriad of products and services, from pizzas and automobiles to legal work and bitcoin mining equipment.

Foster said Butterfly Labs has products ready to sell and ship immediately if the receiver allows shipments during the interim period.

The company, however, cannot return to its collect-first, ship-later sales practices under which it collected money months before products were available, and which the FTC argues never were shipped.

Company officials said previously in court that they had abandoned the pre-paid orders business model last summer.

In a court order last week, Wimes turned down the government’s petition for a preliminary injunction. It would have kept Butterfly Labs under the receiver’s controls as the company and FTC battled over the original complaint.

To get the preliminary injunction, the FTC needed to show that it was likely to succeed on its original charges. Wimes held that, though he was “troubled by some of the evidence” against the company, the FTC fell short of a “stringent standard” on this issue.

The FTC also had to show that there were continuing violations that needed to be stopped to protect consumers, again, something Wimes said it failed to show.

At the same time, Wimes held, the requested injunction against Butterfly Labs would have been “very onerous” to the company and would have affected parts of its business unrelated to the charged misconduct.

Butterfly Labs was ordered to report monthly to the court on its business operations and financial results under Wimes’ order.

The sealed reports will include the company’s “current order queue, number of customers requesting shipment/service activation, number of customers delivered, projected number of customers still requiring shipment and anticipated shipment time frames, status of refund requests and status of reserve or progress toward generating assets to pay out all requested refunds in a timely manner.”

Butterfly Labs also was required to inform the court about the status of its equipment testing and on the bitcoin proceeds the tests generate.

To reach Mark Davis, call 816-234-4372 or send email to Follow him on Facebook and Twitter @mdkcstar.