Monster sues Beats, accuses founders of fraud

Monster says Dr. Dre and Jimmy Iovine pretended to sell the company, defrauding Monster of millions

When Apple bought Beats last year for $3 billion it seemed to be more interested in the company's young music service than Beats Electronics, which makes the Beats headphones, speakers and audio software.

Now, though, that is the part of the business that is about to give them a major headache.

Beats Electronics has been sued by audio equipment maker Monster, who allege that co-founders Dr. Dre and Jimmy Iovine , and HTC America Holdings Inc, of committed fraud in the way that they acquired the rights to Beats By Dr. Dre headphones.

The complaint, which was filed Tuesday in Superior Court in San Mateo County, California, says that, Iovine and Dre, acting as Beats, "entered into a partnership with Monster to develop and promote Monster’s 'Beats By Dr. Dre' product line" in January of  2008.

In September 2011,though, Monster’s agreement with Beats was set to expire, so Dre and Iovine "improperly terminated the arrangement" by invoking a “Change of Control” provision, which allowed them to claim that a 51% interest in Beats had been purchased by HTC for $300 million.

The complaint calls this a "sham transaction," meaning that they "fraudulently acquired" the product line, which included all development, engineering, manufacturing, marketing, distributing, and retail rights. If the the partnership had expired on its own terms, it says, the Beats By Dr. Dre product line would still have been under the control of Monster. 

Only a month later, the complaint says, Beats repurchased over half of the shares that had been sold to HTC, giving Dre and Iovine control of both Beats and the Beats By Dr. Dre product line. After that, Dre and Iovine are accused of trying to "deceptively re-write history by claiming sole responsibility for the success" of Beats By Dr. Dre product line.

"Beats manufactured a false narrative to erase the contributions of Monster and Noel Lee in the eyes of the public, including dealers, Beats consumers, Monster consumers, and eventually Apple shareholders," it says.

"As a result of their corporate betrayal, Defendants were able to make hundreds of millions of dollars on the sale of Monster’s 'Beats By Dr. Dre' product line to Apple for $3.2 billion in 2014, all to the monetary and reputational damage of Plaintiffs."

The HTC deal also had a financial impact on Monster CEO Noel Lee who reduced his 5% stake in Beats to 1.25% after the HTC deal, saying that he was worried about a lack of transparency at the company. Once the company sold for billions of dollars, Lee was out a lot of money.

"Iovine and Dre made hundreds of millions of dollars as a result of the Beats-Apple deal," it says in the complaint. "Had Lee retained his original 5% interest in Beats, his total stake in the Beats-Apple deal would have been worth over $100 million. Iovine, Dre, Wachter, and Wood made hundreds of millions of dollars on the Apple-Beats transaction."

Though this suit, Lee seems to be seeking to be paid back what he lost by selling the majority of his stake in the company.

"Lee and Monster were deceived and kept in the dark about important, pending Beats corporate transactions. As a direct result of Defendants’ improper conduct and misrepresentations, Monster and Lee have sustained millions of dollars in damages."

VatorNews has reached out to Beats for comment on the allegations. We will update this story if we learn more. 

(Image source: flavourmag.co.uk)