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Butterfly Labs Corrects Record on Settlement With FTC and Future Plans

by: Rebecca Campbell

Butterfly Labs Corrects Record on Settlement With FTC and Future Plans

Butterfly Labs Inc. has spoken out to Bitcoin Magazine for the first time since reaching a settlement with the Federal Trade Commission and denies using customers’ Bitcoin mining machines for their own profit.

As a Bitcoin mining company, the last 18 months haven’t been easy for Butterfly Labs. Until recently, the company had remained silent over allegations that it had kept upfront payments from customers’ even when it failed to deliver the hardware and that it had been using customers’ Bitcoin mining machines before shipping them.

Now, though, after signing a court order on February 25, Butterfly Labs says it wants to set the record straight as it begins the long journey of getting the company back up and running.

“Before the FTC came in we were a serious business [with] a very clear picture of where the business was going,” Jeff Ownby, Butterfly Labs vice president of e-commerce and marketing told Bitcoin Magazine. “We had a clear understanding of where the refunds were and the refund liability, [and] we had a clear understanding of the shipping liability that we had, [which] we were tracking very meticulously throughout.”

It had previously been reported by Bitcoin Magazine that Butterfly Labs had reached an out-of-court settlement with the FTC amounting to $38.6 million.

That figure was incorrect, as the orders contain partially suspended monetary judgements.

Against Butterfly Labs and co-founder Sonny Vleisides, there is a suspended judgment of $38,615,161. The judgement that Butterfly Labs has agreed to pay is $15,000 and Vleisides $4,000. The suspended judgement only becomes operative if the judgement figures placed against them are not paid. It was alleged that Darla Drake, Butterfly Labs general manager, used machines from the company to mine bitcoins, which caused her to receive a judgement of $135,878. This, however, would be suspended once she surrendered the cash value of the bitcoins the government says she attained.

Butterfly Labs has stated that the allegation that Drake used machines from the company or customers to mine bitcoins is wrong. The company went on to say that this was the smallest machine the company made and was given to Drake, as well as other customer service agents so they could become familiar with them, after the completed delivery of the 65-nm line of equipment as they were unshippable due to the fact that they were under performing. Butterfly Labs said that employees received these machines as gifts to understand how they worked.

“She only mined a total of four bitcoins as at the time it was easier to mine,” Ownby said. “I have no idea why they came up with that amount, but she settled to get them out of our business, so we can try to fix this mess.”

The settlement of $15,000 and $4,000 were agreed upon by both sides so that Butterfly Labs could end the case.

“The company, with the FTC action, was decimated. This settlement was done to avoid any further legal action and to try and preserve any assets we had left,” said Ownby. “We agreed to that settlement only because we didn’t want to deal with this anymore. We were trying to look to the future, so that’s why we agreed to it.”

Nor is there any merit behind the allegation that the company spent millions on saunas and guns, he said.

“We had a massage person come in every two weeks for the employees as an employee benefit,” said Ownby. “It’s these kind of things that get overblown that we kept getting hammered with, and it was ludicrous.”

According to the Federal Trade Commission, Butterfly Labs was taking orders and charging as much as $30,000 for specialized hardware, but very few orders were being shipped to customers. The FTC alleged that Butterfly Labs failed to disclose to customers that they were “using the machines for themselves before delivering them,” and “failed to deliver the computers until they were practically useless, or in many cases, did not provide the computers at all.

Butterfly Labs told BitcoinMagazine that allegation was untrue, stating that all equipment needed to be tested before shipment in order to reduce the return rate if there was an issue with the hardware, thus taking away the customers’ ability to mine Bitcoins.

“All the equipment has to be tested, [which] made our return rate less than 5 percent, which is great,” said Ownby. “Any piece of electronic equipment that goes out the door is tested before it’s shipped, and that’s all we were doing. Burn testing typically took less than two hours and in rare cases as much as two days, if necessary. To say that we mined with customers’ equipment is ludicrous.”

So how did Butterfly Labs get itself into this situation in the first place?

The Bitcoin industry is a tricky industry to understand. As a relatively new space that is gaining popularity many, such as the FTC, believe that it needs looking into, particularly when a company grows at a fast pace, which was the case with Butterfly Labs.

In 2013, the FTC received around 300 complaints from customers who were not happy with the service from Butterfly Labs. At the time, Butterfly Labs was a pre-order industry, which was a time when the market was shifting and could have played a factor in customers getting nervous about their hardware, thus sending in complaints to the FTC. Ownby says that a clear message was posted on the website about pre-ordering in a changing environment.

“We were very clear, in very bold print saying that if you are uncomfortable with waiting for this product, do not order. This was something that was very clearly printed on our website. It said: “If you’re uncomfortable waiting until the development is complete and the product is shipped, do NOT pre-order this product.”

That, however, did nothing to stem the number of complaints to the FTC. This chart illustrates that the complaints Butterfly Labs started receiving came in when shipment of the 65-nm line of equipment was increasing in 2013. In 2014, 93 percent of all complaints were resolved.

“This was our fourth product line, so we had already taken orders for, developed, and shipped out three or four previous product lines,” said Ownby. “This was not a secret; it was out there. People had received our miners. Most of our customers that were in our 65 nanometer queue, as well as our 28 nanometer queue, were repeat customers.”

He said it came as a surprise to Butterfly Labs when the FTC put out a press release calling the company “bogus” and “scammers,” obtaining a court order in 2014 to shut down Butterfly Labs and freeze its assets. As a result of the three-month shutdown, a temporary receiver was put into place that cost Butterfly Labs more than a million dollars that had to be paid from customers’ money. Not only that, but FTC legal bills and actions came from customers’ money, too, while the company lost sales as a result of the FTC press release.

Despite this, Butterfly Labs was reopened in late 2014 after the U.S. District Court rejected a request by the FTC for an injunction, asset freeze and appointment of a receiver. Judge Wimes ruled that the FTC was unlikely to succeed in their arguments. (Docket 201 Case No. 4:14­CV­00815­BCW). According to Butterfly Labs, this shutdown is what caused customers not to receive a refund or get an order from Butterfly Labs.

“The FTC kept coming and decided that they were still going to have their case against us. They had unfettered access to everything within our facility,” said Ownby. “They had everything they needed to form a case against us, and after three months of being shut down, the judge basically told them that they don’t have a case anywhere.”

Butterfly Labs does admit, though, that there were legitimate complaints about being late.

“Every single hardware manufacturer in the Bitcoin mining space was late,” said Ownby. “Every single Bitcoin mining hardware manufacturer in the U.S. had some sort of court action against them and went bankrupt.”

So what is the future of Butterfly Labs?

Despite the company experiencing a setback, it believes there is still a Bitcoin market and upcoming blockchain revolution it wants to be part of.

“The FTC punched us in the back of the head, and then we were in defensive mode for the next year and a half,” said Ownby. “Unfortunately, the mischaracterizations that they put out there just stuck and we weren’t able to defend ourselves. It’s not going to be an easy thing to come back from, we know that, but we’re going to try our best and see what we can do with this.”

For now, though, the company says its top priority is to get back up and running and allocate the revenue they make to customer refunds.

Thank you!