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Monster Sues Beats, Claiming 'Corporate Betrayal'

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By Mark Wilson, Esq. on January 12, 2015 10:16 AM

Thanks to Apple, Beats Electronics -- makers of those oh-so-hip headphones with the lowercase "B" on them -- has deeper pockets than when it was just Dr. Dre and Jimmy Iovine. Apple scooped up Beats, Iovine, and Dr. Dre back in August for $3 billion.

Monster, which formerly designed and made "Beats by Dr. Dre" headphones, wants a piece of that. It's suing Dre, Iovine, and electronics maker HTC for what Monster calls "corporate betrayal" relating to HTC's 2011 acquisition of an ownership stake in Beats.

You Can Wash Your Car With That Sham

Back in 2008, Beats and Monster entered into an agreement to make the now-famous "Beats by Dr. Dre" headphones. Three years later, Beats terminated the agreement after 51 percent of Beats was purchased by HTC, the Taiwanese electronics company best known for making your Android or Windows smartphone.

Monster claims that the HTC purchase was a "sham transaction" ultimately designed to unilaterally cancel the agreement with Monster and give Beats marketing, manufacturing, and engineering rights that should have belonged to Monster.

Why does Monster think this was a sham? Because less than 30 days after the deal terminating the Monster/Beats agreement was complete, Beats repurchased half of HTC's shares, ostensibly with money that HTC loaned to Beats. Then, Monster claims, Beats set out to erase Monster from the Beats story, claiming Dre and Iovine did everything themselves.

Give Credit (and Money) Where Credit Is Due

There's a fair amount of "I want credit, too!" in this lawsuit. Much of it consists of claims that Monster and its manager Noel Lee single-handedly engineered Beats into a success, portraying Iovine and Dre as little more than promoters who knew nothing about electronics manufacturing while Monster did all the hard work of designing the products, manufacturing them, and selling them through its extant marketing chains.

So what are the claims here? Fraud against everyone, aiding and abetting fraud against HTC, breaches of fiduciary duty, and unfair competition. Monster hasn't named a dollar amount, but it likely wants a piece of that $3 billion Apple acquisition. (Apple isn't technically a defendant, but because Beats is wholly owned by Apple, it's going to have to get involved.)

Monster's factual claims, if true, add up to a shady story indeed. By using the "change of control" provision, Beats was able to keep all of Monster's contributions to the business without giving Monster anything, and the HTC purchase happened just a few months before the Monster/Beats agreement would have expired, which would have divested Beats of the ability to manufacture and distribute headphones. The fact that Beats undid the HTC acquisition so quickly should raise some eyebrows.

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