Beats wins in lawsuit alleging “fraud”

Co-founders of US headphone maker Beats Electronics, Dr. Dre and Jimmy Iovine, have won a lawsuit filed by a former early business partner, Noel Lee.

Lee claimed that the pair double-crossed him out of his share of Beats, which cost him US $100 million (A$$133.1 million) when they sold the company to Apple for US$3.2 billion (A$4.2 billion) in 2012.

Lee was the founder of Brisbane, California-based video and audio cable maker Monster. He says it invented the technology that Beats used.

He held a 5% stake in Beats as part of a partnership by the two companies which saw Monster handling manufacturing, engineering, marketing, and distribution. The partnership ended in 2012.

Lee says that a year before, Dre and Iovine had persuaded him to reduce his stake in Beats. They “fraudulently acquired” Monster’s technology with a “change of control” clause when Taiwanese smartphone maker HTC acquired a 51% stake in Beats in 2011for $300 million ($399.3 million) in what Lee insisted was a “sham” move to take control and push him out of the picture.

Through “misrepresentation” about the future of Beats, he was then persuaded to sell his remaining 1.25% stake back to Beats for $5.5 million ($7.3 million). In the meantime, Dre and Iovine repurchased a 25.5% share in Beats.

The crux of Lee’s lawsuit was that if he still had his 5% stake, he would have made $150 million ($199.6 million) after Apple’s buy-out. If he’d kept his 1.25% stake, he would have made $30 million ($39.9 million).

But in a summary judgement, Los Angeles Superior Court Judge William Fahey found that contracts entered into by Lee and Monster allowed Beats’ actions, because Monster had little say in when the deal ended.

Judge Fahey wrote, “Monster agreed that Beats had the right to terminate the agreement as of January 7th, 2013 or when there was a transaction resulting in a change of control of Beats. [Monster] did not obtain the right to approve the change of control. Nor did the agreement require that any change of control had to be objectively reasonable.”

Therefore, he said, Dre and Iovine had not committed any fraud.

Fahey also dismissed Monster’s claims alleging misconduct by HTC America and Paul Wachter, a Beats investor and board member.

The case was to go to trial next week. But now it will only focus on forcing Monster to pay Beats’ legal fees. Dre and Iovine have always called Lee’s lawsuit “frivolous”.

They say that Beat’s termination agreement with Monster should have prevented this lawsuit — or really any other lawsuit — from being filed in the first place.