Butterfly Labs Faces Class Action Suit Over Pre-Pay Orders

Nermin Hajdarbegovic
Apr 8, 2014 at 17:08 UTC
Updated Apr 9, 2014 at 14:01 UTC

Bitcoin miner maker Butterfly Labs (BFL) is facing a class action suit, brought by customers from across the US.

The class action was filed through Wood Law Firm LLC by a group of BFL customers challenging the sales and advertising practices of the Kansas-based mining outfit.

Customers claim they ordered and paid BFL mining gear which they never received, or which they received long after BFL’s promised shipping date.

Not the first time for Butterfly Labs

Disputes are quite common in the world of mining hardware. Manufacturers are often keen to accept as many pre-orders as possible, often months ahead of the actual shipping date. The money is then used to complete development and manufacture the mining rigs.

Designing ASICs is a tedious process and from the design to tape-out and production, it usually takes on the order of several months – and that’s provided that everything goes according to plan.

In the world of silicon mistakes happen quite often. If the tape-out goes wrong, new chip designs need to be re-spun and put through the same process again. This often happens to big chipmakers, let alone small ASIC designers.

Even a minor glitch can result in a huge setback and due to the nature of bitcoin mining, and a short delay can result in a lot of lost revenue. BFL was forced to delay its 28nm Monarch mining ASIC last month. This was the last straw for many customers, as the ill-fated Monarch was delayed several times since it was announced in August 2013.

The second problem is not of a technical nature. Many companies accept bitcoin payments, which can prove quite risky in the long run. Price swings are just part of the story, as many consumer protection regulations simply do not apply to bitcoin purchases.

This already led to one lawsuit against BFL earlier this year. The company was sued by Martin Meissner, who ordered a couple of miners for $62,000 in March 2013. The order was delayed and there appears to have been a lot of miscommunication between BFL and Meissner, who eventually decided to get a lawyer and sue the company for damages.

Meissner sued BFL for $5m worth of lost revenue, but the company insists the claim is “highly speculative.”

Class action alleges BFL mined for bitcoins

Meissner was not alone. The new complaint, filed before the United States District Court for the District of Kansas, is seeking to recover pre-payments made to Butterfly Labs and the losses incurred by the customers due to the company’s conduct.

The lawsuit alleges Butterfly Labs required customers to pre-pay for orders of ASIC-based bitcoin mining hardware, and used portions of customer pre-payments to make loans to shareholders and purchase a house and automobile for a shareholder.

Obviously the whole point of taking pre-orders and pre-payments is to develop the actual products, not to buy cars and homes, so understandable that consumers have no understanding for BFL’s excuses. Attorney Noah Wood, one of the lawyers for the customers, stated:

“Bitcoin is an exciting and promising new technology. Unfortunately this also makes it an attractive area for people running scams and frauds. Stopping the bad actors and staying vigilant against consumer fraud is absolutely necessary for the successful development of the bitcoin ecosystem.”

The customers allege BFL may have collected over $25m in pre-payments.

Furthermore, the complaint states that Butterfly Labs violated an agreement with customers by mining bitcoins itself. The company told customers that it would not use its own gear to mine bitcoins, but it allegedly did so under the guise of testing new hardware. It is alleged that the “testing” was actually done to generate cash for BFL at the detriment of customers, as BFL used customers’ hardware to mine for bitcoins, increasing the overall mining difficulty in the process.

BFL strongly denies the allegations. A company representative told CoinDesk:

“Butterfly Labs does not believe this lawsuit has any merit, and we are working with our attorneys to clear this up as quickly as possible.”

The complaint alleges that by the time consumers actually received their equipment it was rendered useless by the increase in computational difficulty.

It remains to be seen whether customers can prove BFL actually used the rigs for more than just “testing”. Both sides appear confident that they will have the upper hand in court.