Monster sues Apple's Beats over headphones acquisition

The line of high-end headphones, which Monster helped develop, was "fraudulently acquired" through a "sham" transaction, according to the lawsuit.

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Steven Musil
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Apple's Beats is being sued by Monster, which partnered in development of the high-end headphones. Josh Miller/CNET

Audio equipment maker Monster has filed a lawsuit against Apple's Beats Electronics, claiming that the high-end-headphone maker's co-founders allegedly conspired to sever the headphone line from Monster before Apple bought the company last year for $3.2 billion.

In a complaint (PDF) filed Tuesday in Superior Court in San Mateo County, Calif., Monster alleges that the Beats by Dr. Dre line of headphones was developed in partnership with Beats co-founders Jimmy Iovine and rapper and producer Dr. Dre. The lawsuit claims that Beats "fraudulently acquired" the line of headphones and its technology with a "change of control" clause when Taiwanese phone maker HTC acquired a 51 percent stake in Beats in 2011, depriving the company of hundreds of millions of dollars.

"Had the partnership expired on its own terms, there would have been no transfer of Monster's 'Beats By Dr. Dre' product line, including all development, engineering, manufacturing, marketing, distributing and retail rights" the complaint alleges. "Defendants also absconded with Monster's global distribution chain, key retail relationships and intellectual property."

Less than a month after the HTC purchase, Monster alleges that Beats repurchased half the interest HTC had just acquired.

"At that point, defendants had improperly acquired a company that had been built in a partnership with Monster," the lawsuit alleges.

In what Monster described as an act of "corporate betrayal," Dre and Iovine made hundreds of millions of dollars when they sold the company to Apple last year for $3.2 billion, by far Apple's largest acquisition to date.

Monster's lawsuit claims that the Brisbane, Calif.-based company lost millions as a result of what it called a "sham" transaction. Noel Lee, Monster CEO and co-plaintiff, claims he was persuaded to reduce his 5 percent stake in the company in 2012 out of lack of transparency concerns related to the HTC deal. Lee was later persuaded to sell his remaining 1.25 percent stake back to Beats for $5.5 million, according to the complaint, which said Lee's original 5 percent stake would have been worth more than $100 million after the Apple acquisition was announced.

The lawsuit, which also names two other Beats executives and HTC as defendants, seeks unspecified punitive damages.

Apple declined to comment on the lawsuit.

Beats, established in 2008 by Dre and longtime music industry executive Iovine, is known for hyper-hyped headphones that critics dismiss as being all celebrity endorsement and little substance. But the splashy branding and big-name partnerships have resonated with mainstream consumers, with Beats holding the biggest share of the headphone market despite the high prices of its products, which start at around $99 for earbuds and go all the way up to $450 for pro-grade over-the-ear headphones.