Case Report: Starwood Hotels & Resorts Worldwide v. Hilton Hotels Corporation

Hilton and Starwood Hotels agreed to a settlement on December 22, 2010, putting an end to the ongoing case involving the alleged theft of confidential information and company trade secrets filed by Starwood in April, 2009. Starwood Hotels & Resorts Worldwide v. Hilton Hotels Corporation, No. 09-cv- 03862 (S.D.N.Y. Apr. 16, 2009). The settlement awarded $75 Million to Starwood Hotels, and places a two-year ban on further development of Hilton’s “Denizen” line of hotels, or any other high-end “lifestyle” hotels during that time period.

The suit arose when two of Starwood’s senior executives, Ross Klein, and Amar Lalvani, left Starwood to join Hilton in 2008, and allegedly took over one hundred thousand electronic files containing confidential corporate information and company trade secrets. The former Starwood execs had been involved in the development of Starwood’s “W” hotel brand, and were allegedly hired away to assist Hilton in developing its own competing luxury brand of hotels known as “Denizen.” The complaint alleged that at least five members of Hilton’s Executive Committee knew of Hilton’s possession of Starwood’s confidential information, and that Hilton used this information to bring a competing luxury hotel brand to market without expending the time and money typically required to do so. Along with a claim for the Misappropriation of Trade Secrets, the complaint also alleged claims for Breach of Contract based on Starwood’s Non-Solicitation, Confidentiality and Intellectual Property Agreements, Fraud, Unfair Competition, Conversion, Breach of Fiduciary Duty, Unjust Enrichment, and the Violation of the Computer Fraud and Abuse Act, among others. Due to the Parties’ settlement, the court never directly addressed these claims.

The Settlement Terms

Along with the $75 Million paid to Starwood and two year injunction consented to by the court, the settlement agreement includes a number of other stipulations, including the appointment of two independent monitors that Hilton must hire to oversee their activities and ensure compliance with the mandates of the injunction. Further, the agreement prohibits Hilton from engaging in any substantive business communications or relationships with any hotels or properties currently occupying the “lifestyle hotel” or “branded boutique space” industry that directly compete with Starwood’s “W” Hotel line. The agreement prohibits Hilton’s acquisition of or merger with a hotel chain in this industry, and forbids the repositioning or rebranding of Hilton’s Brand into this industry. Finally, the agreement prohibits Klein and Lalvani from employment by any hotel chain directly competing with Starwood’s “W” hotels.

Potential Criminal Investigation

Although the civil case has been settled, an ongoing criminal investigation against Klein and Lalvani continues. The United States Attorney for the Southern District of New York initiated an investigation into the allegations made by Starwood shortly after the complaint was filed, with potential criminal sanctions under Title 18 of the U.S. Code for Conspiracy, Fraud, Theft of Trade Secrets, and Interstate Transportation of Stolen Goods. During the civil proceedings, the United States Government applied for and was awarded permission to intervene in the case and to stay discovery in order to continue its investigation unhindered. Although no official charges have yet been brought against Klein and Lalvani, such charges seem likely, because the Government rarely moves to stay a civil action unless it is seriously considering filing criminal charges, and the Government’s motion suggested there may be a number of witnesses who agreed to cooperate or plead guilty. Klein and Lalvani could face a maximum sentence of 10 years imprisonment for the Theft of Trade Secrets allegations alone.