Monster just sued Beats Electronics, manufacturer of ubiquitous Beats by Dre headphones, because Monster says it invented Beats, and that Beats stole its property and ran away. It’s been clear for years that Monster designed the headphones, but does the company really have a legal claim to any of Dr Dre’s Monster money? We’re about to find out.
Beats by Dre sells millions upon millions of sets of headphones every year — headphones that were designed by audio electronics experts Monster. In 2012 Beats screwed Monster by walking out and setting up shop on its own, before being acquired by Apple last summer for $US3 billion. (For a short while, HTC owned 50 per cent of Beats before they sold it back, but more on that below.) At issue is whether that screw job was just a business deal gone wrong, or whether it was a violation of the contract between the two companies.
The complaint (embedded below) filed today in San Mateo Superior Court alleges that Dr Dre, along with Beats co-founder and record executive Jimmy Iovine, defrauded and “betrayed” Monster CEO Noel Lee when the companies split back in 2012.
As Gizmodo reported two years ago, the split was never amicable. Dre and Iovine walked away with a brand worth a fortune, while Lee was left with his competent audio company that had no other blockbuster products to rely on. Monster — Monster Cable, technically — was really good at making HDMI cables and patch wires for musicians. They’d provided the hardware design for Beats but not the branding, which was ultimately critical for the product’s success.
This quote from Sam Biddle’s reporting is long, but it perfectly sets up the legal battle that’s about to go down:
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.
In other words, Monster did all the hard work, while Iovine and Dre provided the cool factor.
Technically, the suit alleges that the HTC acquisition specifically was fraudulent; it’s referred to as a “sham acquisition” in the complaint. By briefly selling a majority stake of the company to HTC, Dre and Iovine were able to force Monster to sell its 5 per cent stake in the company. A year later, Dre and Iovine bought their shares back from HTC at a significant discount . Monster was out, but Beats still had Monster’s design as well as industry knowledge about manufacturing and distribution.
In a statement emailed to Gizmodo, Monster’s lawyers characterised the situation like this:
As stated in the Complaint, these claims arise out of deliberate acts of corporate betrayal in the consumer electronics industry…
…The Complaint asserts Defendants, including Jimmy Iovine and Dr. Dre, engaged in a conspiracy and course of conduct to improperly take over Monster’s incredibly successful line of ‘Beats By Dr. Dre’ products, as well as Monster’s intellectual property.
Obviously, the way Monster got cut out was ugly. But were Dre and Iovine’s business moves illegal? Or did Monster’s lack of business acumen lead to its own demise?