Monster sues Beats Electronics and founders for fraud

Wall Street Journal:

In a complaint filed in Superior Court in San Mateo County, Calif., Monster said Beats “fraudulently acquired” the Beats by Dr. Dre line of headphones through a “sham transaction” with HTC, which agreed to purchase a 51% stake in Beats for $300 million in 2011.

This is a complex tale. You might start by reading this article from February 2013, which lays out the history of the Beats, Monster deal.

It starts with Noel and Kevin Lee, the father and son team behind Monster. To hear the story told, the Lees were astute when it came to music, speakers, and headphones, but were in way over their head when it came to negotiating with the team of lawyers at Interscope.

There can’t be two winners. Monster solidified an agreement that got Beats Electronics alive and shipping headphones, but not without gigantic forfeit: Jimmy and Dre’s side of Beats would retain permanent ownership of everything that Monster developed. Every headphone, every headband, every cup, every driver, every remote control—if there was a piece of metal or plastic associated with Beats By Dre, Noel and Kevin Lee surrendered it to Jimmy and Dre. Monster would also be entirely responsible for manufacturing the products—a hugely expensive corner of the deal—as well as distributing them. The heavy lifting.

Back to the Wall Street Journal article:

The complaint asserts that Beats repurchased 25.5% of its own shares from HTC less than a month after the deal closed, allowing Beats to end its relationship with Monster due to a change-of-ownership clause.

Noel Lee ultimately sold his Beats shares:

In September 2013, eight months before Apple agreed to buy Beats in May 2014, Mr. Lee sold his remaining shares. In the suit, Mr. Lee alleges he sold the shares after being misled by a board member that no “liquidity event” was on the horizon for the next year or two.

But Monster’s suit said Mr. Iovine and Apple Senior Vice President Eddy Cue later told a technology conference that the deal was several years in the making.

The question is, does Lee have a piece of paper or an email specifically stating no “liquidity event” was on the horizon, or is this his word against someone else’s? Like it or not, this sounds more like business hardball, where the best prepared team wins.

Note that Apple was not named in the suit.



  • matthewmaurice

    “Jimmy and Dre’s side of Beats would retain permanent ownership of everything that Monster developed. Every headphone, every headband, every cup, every driver, every remote control—if there was a piece of metal or plastic associated with Beats By Dre, Noel and Kevin Lee surrendered it to Jimmy and Dre. Monster would also be entirely responsible for manufacturing the products—a hugely expensive corner of the deal—as well as distributing them.”

    Sounds like Iovine will be right at home at Apple. I wonder if Thomas Gutierrez read than and thought to himself, “been there, done that.”

  • Terry Maraccini

    Beats- Fraudulent headphones Monster- fraudulent cable and hi-fi hype

  • unixandthings

    But “on the horizon” means something is visible. By analogy then, the “liquidity event” would need to be certain or perhaps one could allow it to be weakened to only “somewhat likely”. If the thinking was that a deal was unlikely, but > zero, then saying “not on the horizon” seems perfectly valid. A lot can change in 8 months. And might not getting non-public information from a director be considered insider trading in the appropriate situation?

  • SockRolid

    Hey Monster: f**k you.

    Hey Beats: f**k off.

  • guest

    I realize this will be an easy comment to criticize, but it’s too bad there’s so little honor and trust in business. If this were a person to person (rather then company to company) transaction, the guy who pulled the rug out from the other would be shamed by those around him. In business, you’re considered brilliant.