Court Strikes Down FTC Request for More Butterfly Labs Oversight

A US District Court has denied a request filed by the Federal Trade Commission (FTC) that would have seen Butterfly Labs continue to operate only in a limited capacity under court direction.

Butterfly Labs

will now be allowed to resume business, though it will need to report information about its revived operations periodically to the court. However, it will notably no longer need a court-appointed FTC receiver for the duration of its ongoing litigation.

The FTC receiver had previously been granted the ability to manage and administer the company's finances, among other responsibilities.

Judge Brian C Wimes found that evidence submitted by the FTC to be "insufficient" at demonstrating that Butterfly Labs was likely to continue violating the law, and therefore needed additional oversight. The prosecution had argued that the company was likely to continue to misrepresent facts about its mining equipment if allowed to interact directly with consumers.

The ruling states:

"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."

Butterfly Labs has been under court-appointed receivership since it was shutdown by the FTC this September.

Court 'troubled' by some evidence

The court found that the FTC was unable to prove its assertion that Butterfly Labs misrepresented delivery dates, thereby misleading customers.

Further, it indicated that while it was to some extent compelled by the claims brought against Butterfly Labs, this sentiment was not enough to grant the motion requested by the prosecution.

The court filing reads:

"Admittedly, the court is troubled by some of the evidence. But plaintiff has not established 'questions going to the merits so serious, substantial, difficult, and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by [plaintiff] in the first instance and ultimately by the Court of Appeals.'"

Also dismissed were the agency's allegations that Butterfly Labs overstated the profitability of its mining equipment. Such accusations were largely based on the fact that the company made available a mining profitability calculator on its Facebook page.

The filing concluded that allegations of disingenuous marketing, including one in which a company representative described its products as "money-making machines" on an online forum, were not widely disseminated or made systematically to customers.

The ruling went on to take a broader look at Butterfly Labs' advertising practices:

"Conversely, defendants offered evidence that it has published more than 400 [million] ad impressions through Google that advertise hashing speeds and power efficiency of BFL products but do not mention profitability. Based on all the evidence, the court finds plaintiff fails to establish a likelihood of success on this claim."

End of the pre-order business model

Perhaps most notably, Butterfly Labs assured the court that it will not revert back to its previous pre-order business model when it resumes operations.

Many bitcoin mining hardware companies, including Butterfly Labs, relied on the pre-order business models to develop their products, a system that found them collecting funds for units sometimes months before their release. The model came under criticism as companies in the sector failed to deliver on projected dates.

Judge Wimes explained:

"The pre-order business model has resulted in a class-action lawsuit, another civil lawsuit, the instant lawsuit and an investigation by the Kansas Attorney General. As a result of these lawsuits, defendants have lost employees, upset consumers, and suffered business delays. Based on the current evidence, there is not a clear showing at this time that Defendants intend to reactivate the pre-order business model sufficient to justify the requested relief."

Butterfly Labs proposed to voluntarily submit monthly reports that will document progress made on its commitments.

Court ruling image via Shutterstock

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