REDWOOD CITY, Calif. (CN) – Hip-hop star Dr. Dre conspired to dupe a former partner out of his stake in Beats Electronics, which Apple bought for $3.4 billion last year, Nevada sound equipment company Monster claims in court.
Monster and its CEO Noel Lee on Tuesday sued Beats Electronics, Andre Young pka Dr. Dre, Beats co-founder Jimmy Iovine, Beats official Paul Wachter and HTC America, in San Mateo County Court.
Lee claims he was defrauded of $100 million when (nonparty) Apple bought Beats in May 2014.
Iovine, a founder of Interscope Records, co-founded Beats Electronics with Dr. Dre in 2006.
Lee claims his ideas were integral to the design and development of the Beats headphones, which he says combine the “accuracy of a music studio with the power of a nightclub or a live concert venue.”
Lee claims pitched the idea for high-end headphones to Iovine and Dr. Dre in 2005.
He claims that Beats and Monster entered a licensing agreement in 2008, in which Monster would engineer, produce and distribute the headphones, and Beats would handle the marketing and provide the “Beats by Dr. Dre” branding. The product line’s Studio headphones arrived in stores that July.
In 2009, Lee says, he bought a 5 percent stake in Beats. Also that year, Beats and Monster’s licensing agreement was amended to stipulate that Beats could terminate the agreement if there was a “change in control” – for instance, if someone bought the majority of the company’s stake, according to the lawsuit.
Lee claims that the “change in control” provision was instrumental in Beats’ alleged conspiracy.
He claims that Iovine and Dr. Dre intended to build Beats and then sell it to a major technology corporation for billions of dollars, to the exclusion of Monster. To do so, he claims, Beats used the provision to trigger Monster into turning over its technology and the product line.
Lee claims that Iovine and Dr. Dre created a “sham transaction” to this end. In August 2011, Beats announced that HTC had bought a 51 percent stake in Beats for $309 million, according to the 64-page lawsuit, which contains 444 pages of attachments.
The next month, Beats terminated its licensing agreement with Monster – a decision made possible because HTC’s supposed majority stake in the company had activated the “change in control” provision, Lee claims.
Beats then “strong-armed” Monster into handing over its manufacturing contacts, retail channels and intellectual property and also cut Monster out of the product line’s revenue stream, Lee claims in the lawsuit. The end of the partnership was announced in January 2012.
In July 2013, Beats bought back half of HTC’s stake in the company, increasing Beats’ stake to 75 percent and proving that the HTC transaction was “a complete sham, put in place so that Beats could acquire the entire ‘Beats by Dr. Dre’ product line from Monster,” Lee says in the complaint.
Beats bought the rest of HTC’s stake in 2013.
Once Beats had the majority stake in the company, Lee claims, it took “aggressive steps” to eliminate his 5 percent interest, which Lee reduced to 1.25 percent.
In September 2013, Lee claims, when he was deciding whether to sell the rest of his stake, he asked Beats official Paul Wachter and Beats president Luke Wood whether Beats had any liquidity events in its near future.
Wachter told him, “There will be no liquidity event in the next year or two; nothing is on the horizon,” according to the lawsuit. Lee said he sold his remaining stake for $5.5 million.
Less than eight months later, Lee claims, he learned that Apple was buying Beats for $3.2 billion. Had he retained his original 5 percent stake, Lee says, he would made more than $100 million in the deal.
Beats could not be reached for comment.
Lee seeks punitive damages for fraud and deceit, aiding and abetting, breach of trust, breach of fiduciary duty, unfair competition and other charges.
He is represented by Joseph Cotchett, with Cotchett Pitre, in Burlingame.
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