It’s a monster movie cliché – near the end, when the monster is “dead,” the dust is settling and the heroes are patting each other on the back, the monster rises from the dead and goes on one more rampage before it expires.

Monster Cable, originator of the Beats headphones, has risen from the dead and filed a lawsuit for hundreds of millions of dollars against its former “partner,” Beats Electronics, its principals and the company that acquired Beats Electronics. Monster alleges that the defendants created a $300 million sham transaction to steal Monster’s intellectual property and disenfranchise Monster before Apple purchased the company for $3.2 billion. (Monster’s Complaint)

BACKGROUND

As I discussed more fully in a prior post, Monster and Beats entered into a License Agreement in 2008. In 2011, Beats arranged to sell a controlling interest in the company to defendant HTC. As a result of the sale, Beats was able to transfer Monster’s intellectual property and ownership rights to HTC, and Beats was also able to terminate the License Agreement with Monster. In 2012, Beats repurchased the controlling interest of the company from HTC, along with the intellectual property. And in 2014, Beats sold the company to Apple for $3.2 billion. When the sale was announced, Monster’s reaction to missing the big payday was anything but monstrous. Monster’s CEO , Noel Lee said: “We’re very happy they received such a high valuation. And I’m thinking of what that means for Monster’s valuation.” But like the movie cliché, Monster has now risen from the dead and is on the rampage, suing Beats, its principals and HTC.

MONSTER ALLEGATIONS

The primary focus of Monster’s eight causes of action are that Beats and HTC conspired to create a sham sale of the company to HTC, which effectively stripped Monster of its intellectual property and ownership rights. Later, when Beats had terminated its relationship with Monster, Beats bought the company back from HTC. Monster’s complaint alleges:

The timing of the Beats/HTC transaction that triggered the “Change of Control” provision is significant: it occurred months before the Amended License Agreement was set to expire. If Beats had not exercised the “Change of Control” provision in the Amended License Agreement, the Amended License Agreement would have expired on its own terms and Beats would have lost its ability to assume complete manufacturing, promotion, distribution, and sales of the “Beats By Dr. Dre” product line. (Complaint ¶ 31.)

Monster also alleges that Beats tricked Monster’s CEO into reducing his 5% share of Beats by lying to him about the pending Apple acquisition, which deprived him of more than $100 million.

Monster’s complaint draws a colorful but unflattering picture of two of Beat’s principals:

Dre’s primary contribution was to bless Monster’s headphones when he exclaimed: “That’s the shit!”

[James] Iovine is a respected but ruthless music mogul….

Monster’s complaint does not calculate its damages, but it does allege Lee’s shares were worth more than $100 million and Apple’s purchase for $3.2 billion draws a large target. Monster also seeks punitive damages, which could potentially treble any award.

CLASH OF THE TITANS

Monster has alleged that the HTC transaction was a sham, and Monster’s various claims for fraud, breach of trust, breach of fiduciary duty, etc. all focus on the suspect timing of the controlling interest shell game. Defendants will likely respond that Monster read and signed the License Agreement, and “the deal is the deal.” Under the License Agreement’s terms, Beats was allowed to sell shares, terminate Monster and then buy back shares. This “lawful but awful” defense has a better chance before a judge than a jury, especially a jury in San Mateo, California, Monster’s home town.

As the defendants are reviewing Monster’s complaint, I’m sure they are collecting and pouring through hundreds of thousands of emails among and between Beats and HTC, praying that nobody was stupid enough to create a smoking gun. Any document created during the negotiations leading up to HTC’s purchase of the shares, that discussed Beat’s potential repurchase of the shares, could confirm Monster’s legal theory that, from the start, the HTC purchase was designed as a revolving door scam with the sole purpose of seizing Monster’s technology. As the WikiLeaks, Snowden, and most recently Sony leaks have taught us, anything you write that is incriminating or embarrassing can and will be held against you.

When there’s a huge pile of money staring you in the face, it’s easy to overlook some of the potential pitfalls. But a recent $3 billion monster deal provides a cautionary tale for businesses negotiating make/break the company contracts.

Back in the 80’s, Monster Inc. was known for producing high priced (quality?) stereo cables, but as the public began shifting from stereo systems to headphones, Monster sought to expand into the new market. In 2007, Monster signed a deal with Dr. Dre’s company, Beats Electronics, which lead to the “Beats,” the ubiquitous, colorful headphones and ear buds that are today’s cool credential, like wearing Air Jordans back in the day. (I bought the hype and a shiny pair of red Beats, quick review, meh. Here’s what Consumer Reports had to say about them.

But while Monster’s owners might be audio geniuses, they deserve an F in negotiation and contract comprehension. Without a lawyer, they entered a contract whereby Monster transferred all ownership of the trademarks and technology behind the products to Beats Electronics. Monster also shouldered the obligation to manufacture and distribute the products, an expensive proposition.

INSULT-In 2011, HTC, a Taiwanese company purchased a majority stake in Beats Electronics for more than $300 million, but Monster only got a small payout and according to BusinessWeek.com, in 2012 Beats declined to renew the contract with Monster.

INJURY-Beats bought back a majority share from HTC, and in spring of this year, Apple purchased Beats for $3 billion, mostly in cash, and Monster’s share was zero.

FATAL ERROR 1: Recognize your leverage. Monster had the technology. They could have negotiated a non-exclusive license or an exclusive license with an end date, or they could have sold the technology outright at a higher price. Instead, Monster got the worst of both worlds, losing its technology without adequate compensation.

FATAL ERROR 2: Hire a professional. When you’re sick, see a doctor. When your dishwasher starts spewing water, call a plumber. When you’re negotiating the future of your company, call a business lawyer. Even when you’re “negotiating” with an 800 pound gorilla (i.e. Microsoft, Coca Cola) and you have no leverage, at least have a lawyer look at the contract and identify the potential pitfalls. Whether you’re selling your key technology, disclosing your trade secrets, or indemnifying another party, you need to do so with your eyes open.

FATAL ERROR 3: Understand your relationship. The PR regarding the Monster/Beats deal described it as a partnership, but because Beats owned the technology, Monster ended up as a service provider that merely obtained a cut of the profits. When Beats decided not to renew the contract and sold the company, Monster ended up with virtually nothing, even though it developed the key technology behind the Beats products and considered itself a partner.