We’ve noted before that the FTC has been increasingly aggressive in pursuing a perceived wrong doing and has had a fair amount of success in court in those efforts. The FTC, however, does not win them all. Late last year, the FTC suffered a rare denial of a motion for a preliminary injunction involving a company that sold Bitcoin mining machines.
The FTC sued BF Labs and its principals alleging that they deceptively marketed Bitcoin mining machines and failed to deliver many of the machines that were sold. At the FTC’s request, the court issued an ex parte Temporary Restraining Order (“TRO”). After hearing from the defendants, however, the court dissolved the TRO and denied the FTC’s request for a preliminary injunction that would have included an asset freeze and the appointment of a receiver.
BF Labs sold machines and related services that allowed consumers to mine Bitcoins as a virtual currency. Defendants required that consumers pay the entire price for the machine up-front with prices ranging from $149 to $29,000. The defendants allegedly had a 20,000 order backlog. The FTC alleged that the defendants made two deceptive statements to induce the sale of their machines: 1) that consumers can use the machine to generate a profitable amount of Bitcoins and 2) that the machine would be delivered in a timely fashion.
In denying the preliminary injunction, the court found that the FTC could not show the required likelihood of success on the merits of its claim that the company made deceptive statements regarding machines being delivered in a timely fashion. The court found that the FTC had to show that the defendants had a present intent not to perform at the time it made statements regarding delivery time. The court found that the FTC had offered no evidence on this point. The court accepted the FTC’s argument that inferences might be drawn ultimately to infer that intent, but the court ruled that such inferences were insufficient to meet the standard necessary for a preliminary injunction to issue. In making its ruling, the court noted the absence of FTC case law dealing with this issue and so drew from other legal areas dealing with promises. One reason that this issue has not arisen more frequently is that the FTC often accompanies allegations that claims were false with claims that the defendants lacked a reasonable basis for that statement.
The court also found that the FTC had failed to carry its burden on the profit claims finding that such claims had not been widely disseminated. Defendants offered evidence of over 400 million ad impressions that did not contain the profit language on which the FTC had focused and evidence that the language on which the FTC focused had been used in only a few instances.
The court also found that the equities did not weigh in favor of the issuance of an injunction. The defendants had abandoned the business model at issue several months before the FTC brought suit. The court found the FTC’s evidence of a risk of defendants reverting to their old model to be insufficient. The court also noted that under section 13(b) of the FTC Act the court can issue an injunction only where the defendant is violating or about to violate the FTC Act. The litigation will continue, and the court noted that the FTC may still be able to prevail. For now, though, there are some useful nuggets in this opinion that those engaged with the FTC may want to mine.