October 15, 2014

FTC Alleges Bitcoin-Mining Ads Were More Than a Bit Misleading

Seller Beware: Consumer Protection Insights for Industry

On September 23, a federal court in Missouri granted a Federal Trade Commission ("FTC") request to freeze the assets of Butterfly Labs, a company specializing in Bitcoin-mining computers. "Bitcoin mining" is the use of a particular type of computer software to solve difficult math problems that require significant processing power, which results in issuance of "Bitcoins" or virtual, software-based currency.

According to the FTC, Butterfly Labs marketed its products and services mainly through online advertising, touting the power of its computer equipment and the return on investment that customers would gain from mining Bitcoins. The company even provided "calculators" that potential customers could use to determine the amount of Bitcoins they would be able to mine if they bought certain computer products. Butterfly Labs charged between $149 and $29,899 upfront for its Bitcoin mining machines and services. In many cases, consumers never actually received the computer products. In other cases, the computers provided to the customers were damaged, defective, or delayed so long that they were rendered obsolete.

The FTC alleged that Butterfly Labs and its principals violated FTC Act Section 5(a) (15 U.S.C. § 45(a)). The FTC noted that Butterfly Labs' promotional and marketing materials were false and misleading because the majority of consumers were not able to use their machines to generate the amount of Bitcoins advertised by Butterfly Labs— either because the customers never received functional machines, or because the machines were so obsolete by the time customers received them that their capacity to mine was significantly reduced.

Butterfly Labs will now be controlled by a court-appointed receiver. On October 10, the company fired back against the FTC, arguing in a motion to dismiss that the FTC had failed to present evidence of Butterfly Labs' wrongdoing and failed to understand the Bitcoin industry. A class action against Butterfly Labs, filed in April 2014, is also pending in the U.S. District Court for the District of Kansas.

This case is an important reminder to companies and marketers that their advertisements cannot be misleading or deceptive -- even in new industries such as Bitcoin mining. Companies in rapidly-developing technology areas must be particularly careful, because delays in delivery could render a product obsolete.

We have previously written about Bitcoins (here) as well as the legal issues facing the digital currency industry (here). Agency focus on the industry is likely to continue, and companies would be wise to exercise caution in their marketing activities.

© Arnold & Porter Kaye Scholer LLP 2014 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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