Вы находитесь на странице: 1из 13

Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 1 of 13


Case No. 13-2617-RDR-KGS

BF LABS INC.S MEMORANDUM IN OPPOSITION TO PLAINTIFFS MOTION FOR DEFAULT JUDGMENT Defendant BF Labs Inc. (BF Labs), pursuant to Fed. R. Civ. P. 55(c), respectfully submits this Memorandum in Opposition to Plaintiff Martin Meissners Motion for Default Judgment. As set forth below, BF Labs intends to vigorously defend itself in this lawsuit. Plaintiffs Motion should be denied, and BF Labs should be allowed to address the merits of Plaintiffs claims, which will further the interests of justice. I. Background BF Labs manufactures a line of high speed encryption processors for use in Bitcoin mining, research, telecommunication, and security applications. Dave McLain Declaration, 2, attached as Exhibit A (hereinafter Decl.). At issue here is Plaintiffs pre-order of specialized computer equipment from BF Labs in Spring 2013 designed specifically for the task of mining Bitcoins (Bitcoin Miners or Device). As is industry standard practice and consistent with significant competing manufacturers of similar equipment, BF Labs uses a fully prepaid preorder process where the funds paid by a customer are applied to pay for the purchase of parts and labor used in the multi-month manufacturing process, making it impractical to reverse an order. Decl., 3.

Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 2 of 13

The Bitcoin market price fluctuates widely and frequently. Decl., 4. BF Labs has also observed that a small number of customers have placed orders as part of a Bitcoin price hedging strategy that involves multiple requests to cancel and then reinstate their orders as market conditions change. Id. In order to prevent people from placing, canceling, and later reinstating their orders based on whether the market value of bitcoins is going up or down (which would increase customer service costs and wreak havoc on the supply chain management of parts and components that have to be ordered and paid for in advance, with long lead times, from foreign suppliers), the industry practice has been to require non-refundable full prepayment of the order. Id. However, BF Labs has reserved the right to handle refund requests on a case-by-case basis. Decl., 5. As is the case with most technology, new generations of products are introduced over time with more advanced capabilities. Decl., 6. In the case of the product generation (65nm) that Plaintiff pre-ordered, BF Labs experienced technical delays in its development that held up manufacturing the new technology at commercial scale. Id. When BF Labs had resolved the issues and was ready to commit the orders to the final stage of manufacture, an email notice was sent to customers advising that orders would be shipped as produced and that if anyone was unwilling to endure the wait, they had a final opportunity to cancel their order and receive a full refund. Decl., 7. This notice was sent May 1, 2013 to customers with fully paid orders, and after May 1, 2013 anyone who placed a new order viewed an on-screen pop-up message that advised them of these terms. Decl., 8. In this case, Plaintiff filled out an online order form on March 25, 2013, but did not follow through with his promised payment, effectively abandoning his potential order. Decl., 9. Thirty days after Plaintiff abandoned his potential order, on April 24, 2013, after the price of Bitcoins had

Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 3 of 13

risen significantly and BF Labs had increased its device prices, TradeMost Enterprises, Ltd. (TradeMost) remitted payment of $62,598 but failed to place any order number on the memo in the wire-transfer as instructed by BF Labs. Decl., 10; see also Exhibit B. As a result, BF Labs believed it had received payment for a non-existent order and had to wait for TradeMost to contact it to resolve the unmatched payment. Decl., 10. After the payment was finally identified as being related to the potential order, TradeMost was allowed to make payment at the original, lower price. Id. The order stated that the Bitcoin Miners were to be shipped to Wanli Chen in Hong Kong, despite the fact that Plaintiff was in Shenzhen, China. See Ex. B. It was not until May 5, 2013 that BF Labs was able to apply the funds remitted to the associated order. Decl., 11. Because the payor name and name on the original order form were different, this payment could not be matched to the potential order until after May 2, 2013 when the Plaintiff contacted the Defendant to inquire about this payment, and Plaintiff thus did not have a paid order as of May 1, 2013. See Decl., 12; see also Compl. 33, 34. Because of the unusual circumstances involving the delayed payment, the Plaintiff did not receive the system notice via email, nor did he see the pop-up advisory giving him one final opportunity for a refund. Decl., 13. Despite this, prior to placing his pre-order, Plaintiff had been advised via email communication with Defendant that a multi-month wait was expected for the production and delivery of his order and that in Spring 2013, BF Labs had current back orders from June 2012 that would be shipped first. See Complaint 39. On September 16, 2013, TradeMost asked for a refund claiming that BF Labs refused to provide certainty on a shipping date. Decl., 14. BF Labs rejected TradeMosts request on September 17, 2013 based on BF Labs all sales final policy which the customer had agreed to when he originally placed the order. Id.

Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 4 of 13

Plaintiff filed his Complaint against BF Labs on December 2, 2013 alleging five counts based on BF Labs failure to ship the Bitcoin Miners within a reasonable timeframe and alleging that he is entitled to over $5 million dollars of consequential damages for Bitcoins he claims he would have supposedly mined if he would have received the Bitcoin Miners earlier. BF Labs admits that it had been informed, through counsel, in mid-December that Plaintiffs lawsuit was filed, but believed it had not yet been served with process. Decl., 21. On January 3, 2014, BF Labs learned of issues related to the current mailing address used by its registered agent, and counsel for BF Labs checked the ECF Docket and learned that its registered agent received service in early December and that Plaintiff had already filed an application for Clerks Entry of Default. Id. BF Labs intends to remedy these issues related to the mailing address used by the registered agent. Decl., 22. Despite communicating in mid-December with BF Labs counsel, Plaintiffs counsel never reached out to BF Labs before filing an Application for Clerks Entry of Default. Later that same day, the Clerk entered an entry of default. BF Labs then promptly began drafting a Motion and Memorandum in Support to Vacate and For Leave to File Responsive Pleading (Motion to Vacate). The following business day, January 6, 2014, BF Labs filed its Motion to Vacate. Rather than Plaintiff reaching out to BF Labs counsel or filing a response to the Motion to Vacate, Plaintiff filed his Motion for Default Judgment on January 13, 2014, without mentioning BF Labs Motion to Vacate in his Pleadings. Good cause exists to deny Plaintiffs Motion since the default was not willful on the part of BF Labs, Plaintiff Martin Meissner will suffer no prejudice if the default is set aside, and BF Labs has meritorious defenses to Plaintiffs claims. II. Legal Standard Pursuant to Fed. R. Civ. P. 55(c), a court may set aside an entry of default for good cause. This standard applies to Defendants motion to set aside the entry of a default judgment, 4

Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 5 of 13

rather than the more demanding standard applicable to a motion for relief from a final judgment, when Defendants motion is made before the district court entered final judgment. Dassault Systems, SA v. Childress, 663 F.3d 832 (6th Cir. 2011), cert. denied, 133 S. Ct. 286 (2012). The standard for setting aside a default under Rule 55(c) is less stringent than the excusable neglect standard that courts apply in setting aside a default judgment. Dennis Garberg & Assocs., Inc. v. Pack-Tech Intl Corp., 115 F.3d 767, 775 (10th Cir. 1997). Along those same lines, a district courts discretion is especially broad when an entry of default is at issue, rather than a default judgment. Brady v. U.S., 211 F.3d 44, 504 (9th Cir. 2000). Further, courts look upon default with disfavor, because the interests of justice are best served by a trial on the merits of the case. Gomes v. Williams, 420 F.2d 1364, 1366 (10th Cir. 1970). If there is any doubt as to whether default should be set aside, the court should err on the side of setting aside the default and reaching the merits of the case. Accu-Weather, Inc. v. Reuters Ltd., 779 F.Supp. 801 (M.D. Pa. 1991). As summarized by this Court: The principal factors the court must consider in determining whether [the defendant] has met the good cause standard are: (1) whether the default resulted from culpable conduct by defendant, (2) whether plaintiff would be prejudiced if the default should be set aside, and (3) whether defendant has presented a meritorious defense. Fink v. Swisshelm, 182 F.R.D. 630, 632 (D. Kan. 1998). The standard for setting aside an entry of default under Rule 55(c) is fairly liberal because the preferred disposition of any case is upon its merits and not by default judgment. Clelland v. Glines, 2003 U.S. Dist. LEXIS 8123, 2003 WL 21105084, at *3 (D. Kan. Apr. 11, 2003) (quoting Gomes v. Williams, 420 F.2d 1364, 1366 (10th Cir. 1970)). Commodity Futures Trading Commn v. Wall Street Underground, Inc., No. 03-2193CM, 2005 WL 2122652, at *1 (D. Kan. Aug. 22, 2005). Unlike the facts in this case, courts have even granted motions to vacate default when defense counsel have not had adequate excuses for default and have delayed in bringing the

Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 6 of 13

motion to set aside the default when the amount of money at issue is substantial. See, e.g., Morgan v. Hatch, 118 F.R.D. 6, 9 (D. Maine 1987) (the money at issue - $317,680.50 outweighed the lack of adequate excuse for default). III. Argument Plaintiffs motion for default judgment should be denied. BF Labs filed a motion to vacate the clerks entry of default on January 6, 2014.1 Plaintiff filed his motion for default judgment one week after BF Labs motion without acknowledging BF Labs motion to vacate. BF Labs has met the good cause standard for vacating the default and this motion for default judgment is improper and should be denied. A. BF Labs Default was not willful.

As BF Labs has explained, it did not willfully allow default to be entered against it. Rather, it only found out about the entry of default when it discovered there was a mailing address issue involving its registered agent. Decl., 21. BF Labs was under the impression (admittedly an incorrect one) that it had not been served with process. Id. Upon learning of the service of process, BF Labs promptly drafted its motion to vacate and filed it the next business day. As stated in the motion to vacate, the issues related to the mailing address used by the registered agent will be remedied going forward, but the Court should not give Plaintiff the benefit of a default under the circumstances. B. Plaintiff will not be prejudiced.

Plaintiff will suffer no prejudice if the default is set aside. The passage of time is slight, and there is no reason that the litigation cannot proceed on the merits. Just last month Plaintiff filed his Complaint against BF Labs. The only potential prejudice to Plaintiff is not being able to BF Labs incorporates by reference as if set forth fully herein its Motion to Vacate Clerks Entry of Default and Leave to File Responsive Pleading, as well as its Memorandum in Support of Motion to Vacate Clerks Entry of Default filed on January 6, 2014 (Doc. No. 7 and 8).

Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 7 of 13

sneak an unsupportable damages claim into a default judgment because of BF Labs issue with an address of its registered agent. Plaintiff knew or had reason to know that BF Labs disputed and intended to defend this lawsuit. Because the passage of time is slight, Plaintiff will not suffer any prejudice. C. BF Labs has meritorious defenses.

Plaintiffs motion should also be denied because BF Labs has meritorious defenses to Plaintiffs Complaint2. Each of Plaintiffs causes of action fail because BF Labs has not

breached any contract, has not committed any fraud, has not negligently misrepresented anything to Plaintiff, and is in compliance with the FTC Rule - 16 C.F.R. 435.2 dealing with shipment.3 The FTC Rule states, a seller has a reasonable basis to expect that it will be able to ship any ordered merchandise to the buyer [w]ithin that time clearly and conspicuously stated in any such solicitation. 16 C.F.R. 435.2(a)(1)(i). Under the FTC Rule, when a party such as Plaintiff places a pre-order, BF Labs informs the party a shipping date of two months or longer would take place, meeting the requirements of 16 C.F.R. 435.2. (emphasis added). Plaintiff

affirmatively elected to proceed with his purchase knowing that the Bitcoin Miners could take months to manufacture. Plaintiff admitted in his Complaint that he understood that orders were nearly a year behind at the time he decided to pre-order two Bitcoin Miners. Compl. 32.

BF Labs incorporates by reference as if set fully herein its proposed Answer (Exhibit C), proposed Motion to Dismiss (Exhibit D), and proposed Memorandum in Support of its Motion to Dismiss (Exhibit E) all attached as Exhibits to this Opposition and requests that the Court accept these Pleadings as if timely filed. BF Labs is also in compliance with the Kansas Uniform Commercial Code standards that govern shipment. Under the Kansas Uniform Commercial Code, [t]he time for shipment or delivery or any other action under a contract if not provided in this article or agreed upon shall be a reasonable time. K.S.A. 84-2-309. Here, the parties agreed to the time for shipment or delivery two months or longer. And even if the parties had not agreed to a specific time, BF Labs shipment and delivery of Bitcoin Miners occurs in a reasonable time under the circumstances.

Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 8 of 13

Plaintiff instead decided to bring the current action seeking speculative damages of over 80 times the price he paid to pre-order the Bitcoin Miners. As evidence of meeting the FTC requirements relating to shipping, a manufacturer like BF Labs cannot deliver what they cannot build, nor should they deliver what they know will not work. cannot deliver what they cannot build, nor should they deliver what they know will not work. In the case of the 65nm technology, the SHA256 processor chips consumed more power than engineering design simulations indicated they would, which required that the power regulation, case work and heat removal systems be reworked in order to satisfy the speed specifications that the company had advertised. Decl., 15. Once the necessary product updates were complete and available for manufacture, BF Labs proceeded expeditiously with production. Decl., 16. However, parts shortages periodically delayed production even after the designs had been updated. Id. Initial production began in March 2013 but stalled due to lingering technical issues. Decl., 17. Full production started in the last week of April 2013 and ramped up steadily each month thereafter. Id. Production peaked in November and had fully completed by December when off the shelf stock sales began for the 65nm product. Decl., 18. Forty to fortyfive thousand devices were produced and shipped during April-December 2013. Decl., 19. Units that were completed by BF Labs were shipped out within 72 hours of completion in nearly 100% of cases and generally within 24 hours. Decl., 20. Because Plaintiffs claims fail from the start, BF Labs met the meritorious defense requirement. However, BF Labs has other valid defenses, including the fact that Plaintiffs consequential damages request to each of his five counts fails as a matter of law. Courts reject theories of consequential damages whenever they are too speculative. United States v. Griffith, Gornall & Carman, Inc., 210 F.2d 11 (10th Cir. 1954)(holding that damages which are based on

Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 9 of 13

conjecture or speculation are, of course, not recoverable); Olathe Mfg., Inc. v. Browning Mfg., 259 Kan. 735, 762-68 (1996)(It is responsibility of trial judge to see that speculative and problematical evidence does not reach jury.). Damages here cannot be proved with reasonable certainty. The amount of consequential damages that Plaintiff seeks here are based on

calculations that rely on guesses and assumptions, and which ignore the critical fact that, had TradeMost received the miners when Plaintiff posits it should have, so would everyone else who was awaiting devices ahead of him which dramatically change his earnings calculations. Decl., 23. In addition, Plaintiffs calculations are entirely dependent on a fluctuating market price for Bitcoins. Id. If the price for a Bitcoin had dropped to zero in the time after TradeMost preordered the Devices, Plaintiff would have no damages and surely would not have wanted the Bitcoin Miners. Id. As a result, Plaintiffs calculations are inaccurate and misleading. Id.

Plaintiff pre-ordered two Devices in an attempt to mine Bitcoins in an extremely speculative, fluctuating, emerging and changing market and expects the Court award him a windfall. The law does not support his request. Furthermore, because Plaintiff could have purchased a Miner from another company, he cannot recover consequential damages. If Plaintiff really felt he was missing out on millions of dollars, one would think he would have found a way to purchase another Device. When a party, such as Plaintiff, fails to cover, that party is precluded from a recovery of consequential damages, including lost profits. See, e.g. Kelley Metal Trading Co. v. Al-Jon/United, Inc., 877 F. Supp. 1478 (D. Kan. 1995). (lost profits were not recoverable because (1) buyer failed to establish that it attempted to mitigate its damages and (2) because such losses were speculative). Plaintiffs claims also fail because of the doctrine of estoppel. Equitable estoppel allows one party to prevent another from taking a legal position inconsistent with an earlier statement

Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 10 of 13

or action that places his adversary at a disadvantage. Penny v. Giuffrida, 897 F.2d 1543, 1545 (10th Cir. 1990). The elements of estoppel against a private party are (1) the party to be estopped must know the facts; (2) the party to be estopped must intend that his conduct will be acted upon or must so act that the party asserting the estoppel has the right to believe that it was so intended; (3) the party asserting the estoppel must be ignorant of the true facts; and (4) the party asserting the estoppel must rely on the other party's conduct to his injury. Id. at 154546. Here, Plaintiffs position that the Court should award him substantial, consequential damages is clearly contrary to the fact that Plaintiff knew that the delivery of his pre-order would take multiple months, and Plaintiff decided against purchasing a Device from another seller and decided to wait for his Device to be produced by BF Labs. BF Labs knew and explained it would take multiple months to produce the Bitcoin Miners and could not guarantee a specific delivery date. Finally, BF Labs relied on Plaintiffs decision to proceed with his order knowing that it could involve a multiple month delay. BF Labs also has a meritorious defense as to Plaintiffs fraud claim based on the economic-loss doctrine. The economic-loss doctrine is aimed to prevent contract law from dissolving into tort law by drawing a distinction between commercial transactions, where contract law protects economic expectations, and consumer transactions, where tort law remedies physical injuries to individual consumers. Louisburg Building & Development Co. v. Albright, 45 Kan.App.2d 618, 655-56 (2011) (applying economic loss doctrine to a fraudulent inducement claim). This case presents a breach of contract claim and an entirely duplicative fraud claim, both seeking the same damages. The economic loss doctrine prohibits the assertion of such duplicative claims to prevent the unnecessary complexity that would result from allowing every breach of contract to give rise to a tort. Id. at 655.


Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 11 of 13

Next, Plaintiffs negligent misrepresentation claim fails because it is duplicative of his breach of contract claim -- and is also barred by the economic-loss doctrine. Raab Sales, Inc. v. Domino Amjet, Inc., 530 F. Supp.2d 1192, 1198-99 (D. Kan. 2008) (applying economic loss rule to negligent misrepresentation claim, although based upon Illinois law). But looking past the economic-loss doctrine, under Kansas law, a person cannot negligently misrepresent a present intent to perform in the future. Near v. Crivello, 673 F. Supp.2d 1265, 1279 (D. Kan. 2009). Rather, the exclusive remedy for misrepresentation of intention to perform an agreement lies in the action for deceit. Gerhardt v. Harris, 934 P.2d 976, 986 (Kan. 1997) (quoting City of Warrensburg, Mo. v. RCA Corp., 571 F. Supp. 743, 753 (W.D. Mo. 1983)). Cases from this judicial district routinely dismiss claims of negligent misrepresentation that relate to promises of future action. See Bank Midwest v. Millard, 2012 WL 2583385, at *4 (D. Kan., July 3, 2012); Kansas Waste Water, Inc. v. Alliant Techsystems, Inc., No. 02-2605, 2005 WL 1109456, at *16 (D. Kan. May 9, 2005). Both Plaintiffs Kansas Consumer Protection Act claims fail because TradeMost, and not Plaintiff, pre-ordered the Bitcoin Miners. The individual or sole proprietor must have suffered the injury in order to bring a KCPA claim. Kestrel Holdings I, L.L.C. v. Learjet, Inc., 316 F. Supp.2d. 1071, 1076-77 (D. Kan. 2004). Here, Plaintiff acknowledged that TradeMost wiretransferred the payment for the pre-order to BF Labs. Compl. 27. TradeMosts order stated that the Bitcoin Miners were to be shipped to Wanli Chen in Hong Kong, despite the fact that Plaintiff was in Shenzhen, China. See Ex. B. Furthermore, counsel for Plaintiff sent a demand letter to BF Labs just months ago stating that he represented TradeMost. See Exhibit F (portions redacted). Plaintiffs attempt to try to sneak in a KCPA claim when it is apparent that

TradeMost was the purchaser cannot hold up under Kansas law. For these reasons, BF Labs has


Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 12 of 13

meritorious defenses to Plaintiffs Complaint. The Court should vacate the clerks entry of default and deny Plaintiffs motion for default judgment. Finally, even if this Court refuses to vacate the clerks entry of default and grants Plaintiffs motion for default judgment, Plaintiff will not be entitled to the highly speculative, consequential damages that he is seeking. If a court determines that a defendant is in default, the court does not take the allegations relating to the amount of damages as true. Beck v. Atlantic Contracting Co., Inc., 157 F.R.D. 61, 64 (D.Kan.1994). This Court may decide not to award any damages to Plaintiff. WHEREFORE, Defendant BF Labs Inc. respectfully requests the Court enter an Order denying Plaintiffs Motion for Default Judgment, accept BF Labs attached Answer and Motion to Dismiss as if responded to timely, and for such other and further relief as the Court deems just, proper, and equitable. Respectfully submitted,

/s/ James M. Humphrey James M. Humphrey KS Fed. #70664 Michael S. Foster KS #24011 Polsinelli PC 900 W. 48th Place, Suite 900 Kansas City, Missouri 64112-1895 Telephone: (816) 753-1000 Facsimile: (816) 753-1536 jhumphrey@polsinelli.com mfoster@polsinelli.com Attorneys for Defendant BF Labs Inc.


Case 2:13-cv-02617-RDR-KGS Document 11 Filed 01/27/14 Page 13 of 13

CERTIFICATE OF SERVICE I hereby certify that on January 27, 2014, I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system which sent notification of such filing to the following: Robert F. Flynn The Flynn Law Firm, P.C. 1150 Grand Blvd., Suite 300 Kansas City, MO 64106-2303 Attorneys for Plaintiff

/s/ James M. Humphrey Attorney for Defendant