Policy

New lawsuit against Bitcoin miner manufacturer alleges fraud, negligence

For months now, Butterfly Labs has faced anger regarding delayed orders.

Cyrus Farivar – Feb 5, 2014 5:25 pm | 104

This is BFL's top-of-the-line bitcoin miner, selling for over $22,000. Credit: Butterfly Labs

One of the world’s most mysterious Bitcoin-related companies is now facing its first civil lawsuit in a United States federal court, with many more likely on the way.

Last summer, Ars reported on Butterfly Labs (BFL), which makes ASIC-based Bitcoin miners. In other words, BFL builds little boxes with specialized chips that do nothing but compute hashes in the Bitcoin blockchain—a process which can lead to real money for the miners. Given that the value of Bitcoin has skyrocketed in recent months (hovering around $820 per bitcoin as of this writing), mining coins when their value is lower is clearly profitable.

Martin Meissner, a German-Polish man who lives in China, placed an order for a BFL miner back in March 2013 but ultimately never received his order. He alleges that he spent over $62,000 to order two 1500 gigahash-per-second Bitcoin miners. To date, he has not received a refund for his payment. His lawsuit, filed in December 2013, accuses BFL of breach of contract, fraud, and negligent representation.

Neither BFL nor its attorney, James M. Humphrey, responded to Ars’ repeated requests by phone and e-mail for comment.

Meissner’s attorney, Robert Flynn, told Ars that he has already been contacted by “multiple” people, including other local attorneys with similar complaints, although this is the first suit that he’s filed. If Meissner’s case is successful, it appears likely that it could pave the way for future litigation against BFL.

On Tuesday, BFL filed a motion to dismiss the complaint “for failure to state a claim on which relief can be granted,” adding that “Plaintiff is not entitled to consequential damages as a matter of law because they are too speculative.” Further, because Meissner paid via his own company’s bank account, he personally lacks standing under the Kansas Consumer Protection Act.

“I first contacted BFL and asked for a delivery date, and a long time passed without any response,” Meissner told Ars. “So I went ahead and requested a refund. When BFL responded to the request and rejected the refund, I saw no other way out than to seek an attorney’s help.”

Meissner’s attorney, Robert Flynn, told Ars that he recently spent days trying to arrange for a settlement on behalf of his client.

“I offered an opportunity to reach a settlement before things really ramp up and they made an offer, but it’s clear that they’re not serious about reaching a settlement so we’re going to push ahead with the lawsuit,” he said, declining to name a precise figure. “I can tell you that [the settlement amount] was less than the refund of what my client paid, which is like: ‘Come on man!’ Just [as it says in] the complaint, we’re asking for consequential damages. My client isn’t money grubbing. This isn’t the McDonald’s coffee case, trying-to-get-rich lawsuit. He was trying to get a refund in October [2013] and the response was not responded to and so we filed a lawsuit.”

Butterfly Labs previously lost a civil case by default in Kansas’ Johnson County Court in late November 2013. The plaintiff, a Californian named William Lolli, won a judgement of over $13,000 but told Ars that he had not yet collected the award.

“WTF is wrong with you?”

While Meissner and other customers have been extremely frustrated at the lack of communication and lack of shipment from Butterfly Labs, the Kansas-based startup did send Ars one of its low-end boxes. Ars editor Lee Hutchinson successfully used the box to mine what then amounted to around $600 in bitcoins. Hutchinson then sold them for a US money order and cashed out. (We donated the entire sum to the Electronic Frontier Foundation.)

Prior to getting involved with ASICs, BFL had some experience in the Bitcoin mining business; it had previously made and sold around 2,300 slower Field-Programmable Gate Array (FPGAs) miners from September 2011 to September 2012, earning at least $1.6 million in revenue. In June 2012, BFL started taking orders on the ASIC-based boxes, which ranged in price and capability from $274 for a 5GH/s (gigahashes per second) unit to $22,484 for a 500GH/s machine.

Soon after, new orders for the next-generation machines flooded in. The privately held company won’t say how many orders it received, but if one site inviting customers to add their orders to a public list is to be believed, BFL has taken in at least 7,600 orders worth $10.3 million—and the actual numbers may be higher.

But then, over a year after the first orders were placed, hundreds of angry comments and reddit threads and tweets flooded in. (Example: “WTF is wrong with you? You can’t deliver shit yet u take more $$? Stop fucking delaying Singles on purpose!!”) BFL shipped its first machines in early June 2013. One customer tweeted in December 2013: “Sent 2 emails, left 2 VM’s. Looking at the replies, I’m not alone. Unacceptable. Emailing [Better Business Bureau] & Consumerist next.”

That frustration has continued through to the present day.

“BF Labs believed it had received payment for a non-existent order”

According to Meissner’s original complaint, the dispute comes from a strange circumstance during which Meissner made a March 25, 2013 wire transfer payment from his company, TradeMost Enterprises Ltd. This apparently confused BFL, which did not acknowledge his order. When he inquired further on May 2, the company responded to him by e-mail:

We received your money but the bank tells us only “Trademost Enterprises Ltd” so we were not able to match your payment to your order until we got your email. I have received your payment and sent a copy of your invoice for your records. Your order is processing (paid).

However, Meissner never received his order.

While BFL appears to not have made any public statements concerning this lawsuit, one of its managers responded in late January 2014 in a “Declaration of Support,” outlining the company’s perspective.

That 55-page document, authored by David McClain, the “Large Accounts Manager” at BFL, states that the company “reserved the right to handle refund requests on a case-by-case basis.” It says:

As is the case with most technology, new generations of products are introduced over time with more advanced capabilities. In the case of the product generation (65nm) that Plaintiff pre-ordered, BF Labs experienced technical delays in its development that held up manufacturing the new technology at commercial scale.

When BF Labs had resolved the issues and was ready to commit the orders to the final stages of manufacture, an email notice was sent to customers advising that orders would be shipped as produced and that if anyone was unwilling to endure the wait, they had a final opportunity to cancel their order and receive a full refund.

This notice was sent May 1, 2013 to customers with fully paid up orders, and after May 1, 2013, anyone who placed a new order viewed an on-screen “pop-up” message that advised them of these terms.

In this case, Plain filled out an online order form on March 25, 2013 but did not follow through with his promised payment, effectively abandoning his potential order.

Thirty days after Plaintiff abandoned his potential order, on April 24, 2013, after the price of Bitcoins had risen significantly and BF Labs had increased its device prices, TradeMost Enterprises, Ltd. remitted payment of $62,598 but failed to place any order number on the memo in the wire-transfer as instructed by BF Labs. As a result, BF Labs believed it had received payment for a non-existent order and had to wait for TradeMost to contact it to resolve the unmatched payment.

But Flynn, Meissner’s lawyer, finds this explanation baffling.

“I think it’s pretty disingenuous to say it’s [Meissner’s] fault,” he told Ars. “If he had never e-mailed, what were they going to do? Were they the kind of people that were going to keep $63,000? It’s funny, the blame-shifting game they’re playing. I find it distasteful, the lack of responsibility.”

Listing image: Butterfly Labs

Cyrus Farivar Editor at Large

Cyrus is a former Senior Tech Policy Reporter at Ars Technica, and is also a radio producer and author. His latest book, Habeas Data, about the legal cases over the last 50 years that have had an outsized impact on surveillance and privacy law in America, is out now from Melville House. He is based in Oakland, California.

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