Monster, LLC v. Superior Court of L. A. Cnty.

• Decision Date: 21 June 2017
• Docket Number: B278289
• Citation: 12 Cal.App.5th 1214,219 Cal.Rptr.3d 814
• Court: California Court of Appeals Court of Appeals
• Parties: MONSTER, LLC et al., Petitioners, v. The SUPERIOR COURT of Los Angeles County, Respondent; Beats Electronics, LLC, Real Party in Interest.

12 Cal.App.5th 1214

219 Cal.Rptr.3d 814

MONSTER, LLC et al., Petitioners,

v. The SUPERIOR COURT of Los Angeles County, Respondent;Beats Electronics, LLC, Real Party in Interest.

B278289

Court of Appeal, Second District, Division 7, California.

Filed June 21, 2017

Cotchett, Pitre & McCarthy, Santa Monica, Joseph W. Cotchett, Philip L. Gregory, Burlingame; Gordon & Reese, Gary J. Lorch and Elizabeth B. Vanalek, Los Angeles, for Petitioners.

No appearance for Respondent.

Boies, Schiller & Flexner, Los Angeles, William A. Isaacson and Karen L. Dunn for Real Party in Interest.

ZELON, Acting P.J.Petitioners Monster LLC and its founder, Noel Lee, filed a tort action alleging Beats Electronics had engaged in a fraudulent scheme to deprive them of their interest in the company. In its answer, Beats asserted all of the petitioners' claims were barred by release provisions set forth in the parties' prior written agreements. Beats also filed a cross-complaint alleging that: (1) petitioners had breached the terms of those written agreements by filing their complaint; and (2) petitioners' acts had damaged Beats by causing the company to incur attorney's fees and other litigation costs.

Beats filed a motion for summary judgment seeking dismissal of petitioners' claims based on the contractual release provisions. The court granted the motion, and set a trial on Beats's cross-claims for breach of contract. At a subsequent case management conference, Beats argued that Civil Code section 1717 required the court, rather than a jury, to determine the amount of attorney's fees it was entitled to recover as damages on its cross-claims. Petitioners, however, asserted that because Beats was seeking its attorney's fees as a form of contract damages, they were entitled to a jury trial on the issue. After receiving supplemental briefing, the court entered an order directing that the amount of Beats's attorney's fees be resolved through a noticed motion.

Petitioners filed a petition for writ of mandate seeking an order directing the trial court to vacate its order, and enter a new order granting them a jury trial on the issue of attorney's fees. We issued an order to show cause, and now grant the petition.

FACTUAL BACKGROUND

A. Summary of Events Preceding the Filing of Monster's Complaint

1. Summary of the parties' licensing and manufacturing agreements

Noel Lee is the founder and manager of Monster LLC, an audio equipment company. Between 2005 and 2008, Lee and Monster (collectively Monster) entered into discussions with Andre Young (also known as Dr. Dre, hereafter Dre) and Jimmy Iovine to design and manufacture a new line of headphones. In January of 2008, Iovine and Dre signed a licensing agreement granting Monster the right to manufacture and sell "Beats by Dre"—branded headphones. After entering into the agreement, Dre and Iovine founded "Beats Electronics" (Beats).

In August of 2009, Monster and Beats entered into an amended agreement that superseded the 2008 licensing agreement. The amended agreement included a provision stating that Beats had "the right to terminate [the agreement] ... at any time on or after the earlier of (i) January 7, 2013 or (ii) the closing of a transaction that results in a Change of Control." Beats's operating agreement defined the term "Change of Control" to mean the acquisition of more than 50 percent of the company. The amended agreement further provided that upon termination, Monster would be required to: (1) transfer its ownership rights to the "industrial design" of all Beats-branded products to Beats; and (2) grant Beats a non-exclusive license to use any intellectual property that was necessary for the "continued manufacture and sale of all Beats products." The amended agreement also contained a provision granting Lee a 5 percent ownership interest in Beats.

2. Termination of the 2009 licensing agreement

In August of 2011, mobile phone manufacturer HTC agreed to purchase a 51 percent interest in Beats for approximately $300 million. Several weeks later, Beats notified Monster that the sale to HTC qualified as a "Change of Control," and that Beats intended to exercise its right to terminate the 2009 licensing agreement. In June of 2012, Beats and Monster executed a "Termination Agreement and Mutual Release" (Termination Agreement) setting forth the terms of Monster's "transition and separation" from Beats.

The "Recitals" section of the Termination Agreement stated that the parties had entered into the agreement "to affirm the termination" of their prior agreements, including the 2009 licensing agreement, and to "mutually release each other from [existing] claims, ... and set forth the [p]arties' remaining obligations to each other." Under the terms of the Termination Agreement, Monster was provided "the right to act as Beats' sales representative and distributor through the end of 2012, and the right to certain royalties through the end of 2013." Monster, in turn, agreed to waive "any and all causes of action, claims, rights, judgments ... or liabilities [,] ... arising under or in connection with the performance or termination of the [prior licensing agreements]."

The Termination Agreement also included an attorney's fees provision stating: "In the event that any [p]arty brings an action to enforce or affect its rights under this Agreement, the prevailing [p]arty ... shall be entitled to recover its costs and expenses, including, ... reasonable attorney's fees, incurred in connection with such an action."

3. Lee's sale of his 5 percent interest in Beats

In December of 2012, Lee decided to sell back three quarters of the 5 percent interest he had obtained in Beats pursuant to the 2009 licensing agreement, leaving him with a 1.25 percent ownership interest in the company. The terms of the sale were set forth in the "2012 Unit Repurchase Agreement," which contained a provision releasing all claims related to the transaction, including claims for fraud or fraudulent inducement.

In October of 2013, Lee elected to sell Beats back his remaining 1.25 percent interest in the company. The terms of the sale were set forth in the "2013 Unit Repurchase Agreement," which contained a provision stating that both parties agreed to release all claims "pertaining or relating to the Securities, including without limitation, causes of action for breach of fiduciary duty, negligent misrepresentation, fraud and fraudulent inducement...." The 2013 agreement also included an indemnity provision stating, in relevant part: "Each party to this Agreement agrees to defend, indemnify and hold harmless the other party ... from and against all losses, damages, liabilities, claims ... and expenses (including reasonable attorneys' fees) arising out of, relating to or resulting from any breach of this Agreement, including any representation or warranties contained therein, by the indemnifying party."

Approximately seven months after the parties executed the 2013 Unit Repurchase Agreement, Apple acquired Beats for over $3 billion.

B. Summary of the Parties' Pleadings

In January of 2015, Monster filed a tort action alleging Beats and HTC had engaged in a fraudulent scheme to divest Monster of its interest in Beats and the "Beats by Dre" line of headphones. According to the complaint, HTC's decision to acquire a 51 percent interest in Beats had been a "sham ‘Change of Control’ event" that was intended to force Monster out of the company, and allow Beats to "assume complete manufacture, promotion, distribution and sales of the ‘Beats by Dre’ product line." The complaint further alleged that less than a month after Monster had finalized the Termination Agreement with Beats, HTC loaned Beats over $200 million, which Beats then used to purchase back half of HTC's 51 percent interest in the company.

The complaint also alleged Beats had fraudulently induced Lee to sell back his remaining 1.25 percent interest in the company. Lee claimed that before agreeing to sell back his interest, he had asked Iovine and Beats President Luke Wood whether the company expected any "liquidity events" in the near future. Iovine and Wood both told Lee no such events were planned. Based on these representations, Lee agreed to sell his remaining interest in Beats back to the company for approximately $5.5 million. Eight months later, Lee learned Apple was acquiring Beats for $3.2 billion, increasing the value of Lee's former 1.25 percent interest to over $30 million.¹

In its answer to the complaint, Beats asserted waiver as an affirmative defense, claiming that all of Monster's causes of actions were barred by the release provisions set forth in the Termination Agreement, the 2012 Unit Repurchase Agreement and the 2013 Unit Repurchase Agreement.

Beats also filed a cross-complaint alleging Monster and Lee had breached the terms of those agreements by filing their lawsuit. In its first cause of action for breach of the Termination Agreement, Beats alleged: "The gravamen of Monster's claims against Beats.... is that the HTC transaction was a ‘sham "Change of Control" transaction’ executed solely to ‘exclude Monster and Lee from the sale of the "Beats by Dre" product line.’ [¶] ... [¶] By bringing these ‘sham’ claims Monster breached the Termination Agreement's release provision.... [¶] Monster's breach of the Termination Agreement has damaged and continues to damage Beats. Beats has been, and will continue to be, forced to expend money, time, and other resources in order to defend against Monster's meritless and released claims in this litigation—damages that, but for Monster's breach, it would not have suffered."

In its third cause of action for breach of the 2013 Unit Repurchase Agreement, Beats similarly alleged: "The gravamen of Lee's claim ... is that he was coerced and deceived into selling his shares of Beats in order to deprive him of any profits from the eventual (though unknown at the time) sale of Beats to Apple. [¶] ... [¶] By bringing these stock sale claims Lee breached the...