According to a class-action lawsuit filed in the US district court for Northern California, Bitmain has been taking advantage of its customers the past couple years in an interesting way: mining crypto for itself, using their resources, during the “initialization” process. You read that right. According to at least one Bitmain customer and bitcoin miner, who is filing a suit for damages in excess of $5 million on behalf of miners everywhere, the initial period during which a miner is in its owners’ possession is spent mining for Bitmain’s benefit.

The lawsuit brought by Gor Gevorkyan, who lives in Los Angeles, alleges that the initialization process for a Bitmain miner can be several hours in length. An outfit that purchased, say, 500 or more units, could, therefore, contribute significant hash power to Bitmain — at no actual cost to the company. In fact, the company has already profited prior to receiving this hash power.

Per the filing, there is no way to know how many people are actually represented in the class-action lawsuit because they could feasibly number in the “hundreds of thousands.” Further, it notes that Bitmain did not always operate this way — previously, when miners were in “initialization” mode, they could be set to consume less power.

The allegations in the suit will have to be proven out in the courts, and even if they are true, Bitmain’s defense could involve the good old terms and conditions of a purchase. However, this defense is likely to be weakened by the invocation on the part of the plaintiff of the unfair competition rules in place in this country, as well as the appearance of unjust enrichment. In essence, Bitmain is double-dipping to the extreme if any of his allegations are provably true.

As blockchain lawyer Nelson M. Rosario explained in his weekly “Crypto Caselaw Minute“:

“If these allegations are true (and we are not saying that they are) … that’s, that’s not good. Even under some sort of theory that customers agreed to this under the terms & conditions of their purchase, or something like that, this is not a good look regardless of its legality. With respect to its legality, the plaintiff is alleging unfair business practices, unjust enrichment (receiving a benefit at someone else’s expense), and conversion (basically stealing).”

Gevorkyan’s suit is being litigated by Robert Starr and Frontier Law Center, both of whom have successfully prosecuted class-action suits in the past. Starr has claimed tens of millions in damages under the California “lemon law,” which protects car owners from unsavory dealers and/or auto companies.

It would seem that if Bitmain decides to make a settlement in the case, anyone who purchased a miner in the qualifying period would be eligible for damages. What’s unclear is whether those who purchased them second-hand would also be eligible, as presumably when the hardware is reset, the “initialization” process is then again required.

Responding to the allegations, an external Bitmain spokesperson told CCN.com that the company does not use customer devices to mine.

“Bitmain does not use customer devices to mine,” the spokesperson said. “Mining for itself has long been a part of Bitmain’s business and it has always been transparent. You can find further information on its transparency policy here and hashrate disclosure here.”

In any case, the suit comes at an interesting time for Bitmain, which is planning an IPO for next year. As CCN.com’s Josiah Wilmoth wrote, this lawsuit will just be one more problem for Bitmain and its IPO:

“[…] As detailed by BitMEX Research, Bitmain appears to have made several questionable business decisions over the past year, including stockpiling bitcoin cash — the value of which has taken a steep hit — and overestimating consumer demand for mining hardware, which has left the firm sitting on a stockpile of rapidly-depreciating products. These factors could have played a role in the decision to make changes ahead of the public offering.”

Read the full filing below:

Bitmain Class Action by CCN.com on Scribd

Update 11/24: Updated to include comment from Bitmain

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