A legal battle between hotel chains Hilton Worldwide and rival Starwood Hotels & Resorts Worldwide, which included allegations of corporate espionage and stolen trade secrets, has ended in a settlement that cost Hilton some bruising concessions.
Hilton, which was accused of pilfering proprietary information about Starwood's successful W hotels in order to build its own luxury boutique chain, has agreed to stay out of that market segment until January 2013. Hilton also agreed to let an outside monitor make sure it returns any stolen files and other documents to Starwood.
Additional terms of the settlement were confidential, but the New York Times reported that Hilton also agreed to pay Starwood $75 million.
"The settlement is basically a cry of 'uncle,'" said Todd Sullivan, a trade secrets lawyer with Womble Carlyle in North Carolina. "Presumably, Hilton reached the conclusion that the case was virtually indefensible."
Starwood alleged in a lawsuit that when its former employee Ross Klein left the company in 2008, he carted off thousands of pages of documents to help Hilton launch a lifestyle brand similar to Starwood's W chain. In 2009, Hilton Chief Executive Christopher Nassetta hailed Klein as a "creative genius" when the company announced the concept for a chain of sophisticated, upscale hotels to be called Denizen.
Based in White Plains, N.Y., Starwood sued last year in federal court in Manhattan for misappropriation of trade secrets, accusing Hilton of using stolen materials to quickly launch its new brand. The lawsuit alleged that during his final days at Starwood, Klein used a personal laptop to download thousands of pages of company data, including demographic studies, financial reports and other records related to plans for W hotels.
The lawsuit also alleged that 44 executives at the highest levels of Hilton had read the stolen materials before launching Denizen.
After the lawsuit was filed in April 2009, Hilton ditched the Denizen brand and fired Klein after 11 months on the job. Last year, Hilton disclosed that it had received a grand jury subpoena requesting any Starwood materials in its possession that may have come from Klein or another Starwood employee, Amar Lalvani.
Criminal charges were not filed.
In a settlement approved Wednesday, Hilton agreed to several concessions. Among them: Hilton won't launch any luxury boutique hotels in the next two years in areas where it had planned to launch Denizens, and it won't compete with Starwood in the luxury boutique hotel business for two years. It also said it would refrain from hiring any Starwood executives or managers for two years. And it agreed to submit to supervision by a court-appointed monitor, who is to ensure that Hilton returns any stolen materials and does not use any information in such materials for strategic purposes.
"Hilton Worldwide regrets the circumstances surrounding the dispute with Starwood Hotels & Resorts Worldwide and is pleased to bring an end to this prolonged litigation," Nassetta said in a statement. "Hilton worldwide is committed to fair, ethical and robust competition in the marketplace."
Starwood Chief Executive Frits van Paasschen said the settlement "restores a level playing field for fair competition."
"Given the facts, we had no choice but to stand up and protect our brands on behalf of our investors, associates, owners and customers," he said.
The Denizen brand was Hilton's attempt to catch up to Starwood's successful W brand, which opened in 1998 in New York and quickly attracted stylish, young travelers willing to pay top dollar to enjoy its sultry lounges, individually designed rooms and trendy furnishings. Starwood now operates dozens of W hotels around the world, including locations in Hollywood and Westwood.
Any plans for Hilton to enter that sector are on hold until Jan. 1, 2013, under terms of the settlement.
"That's a major-league competitive setback for them," said Sullivan, the trade-secrets lawyer.
By that time, any knowledge that Hilton executives may have gathered from the allegedly stolen materials would be five years old — and largely worthless, Sullivan said.
Hilton, formerly based in Beverly Hills, is now headquartered in McLean, Va. The company was acquired in 2007 by the Blackstone Group for $26 billion. In addition to its name-brand hotels, Hilton operates several other chains, including Embassy Suites and the Waldorf Astoria hotels.
Starwood is one of the largest hotel and leisure companies in the world, with more than 1,000 properties in 100 countries and 145,000 employees. Its brands also include St. Regis, Westin, Le Meridien and Sheraton.