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)
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.
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.