Monster Sues Beats, Alleging 'Sham' Transaction that Led to Apple Acquisition

Recent Apple acquisition Beats is facing another lawsuit, this time from Monster, the company that first manufactured the controversial audio brand.

The complaint, filed Tuesday in California’s San Mateo County Superior Court, alleges that Beats executives Andre “Dr. Dre” Young and Jimmy Iovine conspired to steal the technologies and designs behind the “Beats by Dr. Dre” headphones that made the brand popular, depriving Monster and the company’s CEO, Noel Lee, of millions of dollars in profits.

The original Beats headphones, launched in 2008, were a joint project between Beats and Monster, with the suit alleging that Monster was primarily responsible for the design and technical aspects of the product, while Mr. Iovine and Mr. Young primarily used their pop culture status to promote the headphones. The suit goes so far as to claim that Mr. Young’s “main contribution was to bless Monster’s headphones when he exclaimed: ‘That’s the sh-t!’”

lee_iovine_dre_beatsMonster CEO Noel Lee with Beats Co-Founders Andre "Dr. Dre" Young and Jimmy Iovine (image via Jake Ludington/Flickr)

Beats headphones quickly became popular, but Mr. Lee claims that he and Monster were unjustly denied their share of the success thanks to the aggressive negotiating skills of Mr. Iovine, who pressured Monster into signing a deal that let Beats retain “permanent ownership of everything Monster developed.”

The consequences of this contract would be realized in 2011, when 50.1 percent of Beats was sold to HTC for $300 million. Curiously, Beats and HTC split less than a year later, citing financial disagreements, with HTC selling 25.5 percent of Beats directly back to Mr. Iovine and Mr. Young, a move that financial firm Morgan Stanley called “puzzling.” This allowed the Beats executives to exercise a “change of ownership” clause in the contract with Monster, effectively nullifying Monster’s ownership and and voice in the deal.

Monster’s lawsuit calls the deal a “sham,” claiming that Mr. Iovine and Mr. Young orchestrated the quick sale and return to unjustly cut Monster out and retain full ownership of the company for themselves, a move that paid off well following Apple’s acquisition of Beats last year for $3 billion.

Following the HTC reversal, Mr. Lee was left with 5 percent of the company, which he claims he was “persuaded” to reduce to 1.5 percent, and then eventually to nothing. Eight months later, Apple aquired beats, netting Mr. Iovine and Mr. Young hundreds of millions each.  The suit notes that Mr. Lee’s 5 percent would have equated to $100 million in the Apple acquisition, although the suit is seeking unspecified punitive damages.

Beats was also sued by Bose in July 2014 for patent infringement relating to noise-canceling headphone technology. The two companies settled the suit in October on undisclosed terms.