5:43pm PT by Ashley Cullins
Beats Headed to Jury Trial Over Monster Legal Fees
Beats must make its plea for attorney's fees from Monster LLC before a jury, not a judge, a California appellate court ruled Wednesday.
This legal fight began in the fall of 2015, when Monster, an audio equipment company not to be confused with the energy drink of the same name, and its founder Noel Lee sued Beats Electronics.
Music magnate Jimmy Iovine, Andre Young (aka Dr. Dre) and Lee agreed to a deal in 2008 that granted Monster the right to manufacture and sell Beats by Dre headphones, and amended their agreement the next year. That 2009 deal included a provision that Beats could terminate the agreement on or after Jan. 7, 2013, or upon the closing of a transaction that results in the change of control — which Beats interpreted as the acquisition of more than 50 percent of the company. The termination provision was triggered in August 2011, when HTC paid $300 million for 51 percent of Beats.
Lee had acquired 5 percent of the company in the 2009 agreement, and subsequently sold 3.75 percent back in 2012 and the remaining 1.25 percent in 2013. Seven months later, Apple bought Beats for $3 billion — and Lee claims the HTC acquisition was a "sham" to cut him out of the Apple profits.
Monster sued for fraud in January 2015, alleging that the HTC deal was designed to force the company out of the manufacturing process and that Lee had asked Iovine whether any "liquidity events" were on the horizon before he sold his remaining interest and was told none were planned. Lee was paid $5.5 million for that 1.25 percent, which he says would have been worth upwards of $30 million he had cashed out after the Apple purchase.
Beats fired back, arguing that all of Monster's and Lee's causes of action were barred by release provisions in their agreements and filing a cross-complaint alleging the fraud lawsuit was filed in breach of their deals.
In 2016, Beats prevailed on a motion for summary judgment. The court dismissed Monster's lawsuit with prejudice, finding that the claims were barred by the release provisions, and sent only the cross-complaint forward to trial. Beats then argued that the damages sought — attorney's fees arising from defending the fraud claims — should be decided by a judge instead of a jury under Civil Code section 1717. Beats argued the code provides that when a contract provides that attorney's fees and costs will be awarded to the prevailing party, the amount awarded will be fixed by the court. Los Angeles Superior Court judge William Fahey agreed and ruled the “'attorney’s fees issue' would be 'heard by way of a noticed motion resolved by the court.'” Monster appealed, which prompted the decision at hand.
A 2nd District panel on Wednesday vacated the superior court's order and instructed it to "issue a new order directing that Monster and Lee are entitled to a jury trial to determine the amount of those attorney’s fees."
"If Beats ultimately prevails on its breach of contract claims, section 1717 would allow it to move for attorney’s fees that it incurred in litigating those claims, but the statute has no application to the fees Beats has sought as damages on its contract claims, which must be 'proven — as any other item of damages — at trial,'" writes acting presiding justice Laurie Zelon.
Further, the panel found that upholding Beats' interpretation of section 1717 could undermine the state's constitution, which provides civil litigants the right to have a jury assess damages in breach of contract actions.
"When possible, we must construe statutes in a manner which avoids constitutional difficulties,'" writes Zelon. "Applying that principle here, to the extent section 1717 can be reasonably interpreted in the manner Beats proposes, we reject that reading to avoid the difficult constitutional questions it would raise."
The full decision is posted below.