Start-ups: Don’t Get Beat(s) Down, Learn from MONSTER’s $3 Billion MistakeSep 17, 2014 IP Legal Forum
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.