A federal District Court in Kansas denied BF Labs', a manufacturer of specialized high speed computer hardware for Bitcoin mining, motion to dismiss claims alleging a total failure to deliver its products after taking customer orders. In rejecting BF Labs' motion to dismiss, the judge repeatedly stated that its defenses, "should be considered at the summary judgment stage." In future decisions we may see the law of consequential damages applied in the context of Bitcoin mining.
Kansas based BF Labs has been manufacturing Bitcoin mining equipment since 2011. Using the computers made by it and its competitors, Bitcoin miners attempt to be the fastest to properly record new transactions onto the Bitcoin shared ledger, the blockchain, with the fastest miner rewarded with the issue of a new lot, or block, or Bitcoin. In late 2012, BF Labs began taking orders for its new line of computers designed solely for this process. Throughout much of 2013 it grew a large order backlog, frustrating customers and giving rise to a variety of theories for the cause of the delays.
Meanwhile, Bitcoin burst into the public consciousness with a steep rise in price, topping out at approximately $1200. The meteoric rise in Bitcoin prices only further fueled customer anger, as the Bitcoin they hoped to have earned using BF Labs' products suddenly became much more valuable - essentially the lost profit argument for consequential damages. Conversely, as rising Bitcoin prices brought more competitors racing to record transactions to the blockchain, the back ordered equipment slipped towards obsolescence, as faster systems have been released.
At least two lawsuits arising out of BF Labs' delayed deliveries are pending before the U.S. District Court for the District of Kansas. In the first, Meissner v. BF Labs, the plaintiff seeks $62,000 in contractual damages for unfulfilled orders - and $5,000,000 in consequential damages based on a rough estimate of lost mining profits. Without its claim for consequential damages, plaintiff would not satisfy the amount in controversy requirement for federal diversity jurisdiction. In a memorandum opinion dated June 6, 2014, the court rejected defendant's motion to dismiss, finding sufficient factual allegations to sustain plaintiff's claims. Specifically, the court allowed that consequential damages may be appropriate, implicitly rejecting any argument of an insufficient amount in controversy. The court was also unconvinced by defendant's characterization of certain of plaintiff's claims as improperly duplicative.
The second filed lawsuit, a class action first filed in April, explosively alleges that while BF Labs kept customers waiting, it used their computers for its own Bitcoin mining. This allegation has been widely accepted as truth within the Bitcoin community, and could form the basis for awarding consequential damages in the Meissner case. After all, if the seller was able to profit from the promised equipment, the damages are no longer speculative.
As the Meissner case proceeds we may get to see the court grapple with consequential damages arising from Bitcoin mining. The arguments will be especially interesting for two reasons: first is a choice of law question since the defendant is incorporated in Wyoming and based in Kansas, while the plaintiff self-identifies as "a dual German-Polish national, residing in… China,"possibly implicating the CISG. Second, the parties' presumed familiarity with the complex mathematical nature of Bitcoin mining points towards the foreseeability of mining profits, while the competitive nature of what is essentially a race by high speed computers points towards the speculative nature of the forecast profits. As with any new technology, the outcome promises to be closely watched.
Samuel Cahn received his JD from the New York University School of Law, and is a principal in Coin Capital Management, LLC, a New York based Bitcoin focused investment management firm.