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Hotel wars: Drama and intrigue behind the hospitality trade

After a force behind the W chain defected to Hilton, a lawsuit exposes a side of the industry rife with claims of corporate espionage, double-dealing and poaching of top performers.

June 06, 2010|By Nathaniel Popper, Los Angeles Times

Reporting from New York — — When Ross Klein arrived at Hilton Worldwide's Beverly Hills headquarters to create a new luxury chain, he was the "it" guy in the hottest segment of the lodging business.

A former retail marketing whiz, Klein had trained his fashion sense on the buttoned-down hotel industry, helping turn the W chain into a hip money-maker for its parent, Starwood Hotels and Resorts Worldwide Inc. Hilton lacked a product to compete. So it lured Klein away from Starwood in 2008 by offering him a chance to build a brand from scratch.

Klein delivered, quickly cooking up Denizen, a funky, sophisticated hotel concept. At a lavish launch party last year in Berlin featuring scantily clad dancers and an opera singer, Hilton Chief Executive Christopher Nassetta hailed Klein as a "creative genius."

But to hear his ex-employer tell it, Klein is a copycat and a thief. Starwood claims he carried off thousands of pages' worth of documents filled with the company's trade secrets and shared them with Hilton management, according to a civil lawsuit it filed last year in U.S. District Court in New York. Now federal prosecutors are looking into filing criminal charges against Klein and others that include conspiracy, computer fraud and theft.

Hilton denies that any senior executives knew about the material and says it is cooperating with the government. The company fired Klein after just 11 months on the job and killed the Denizen brand.

But the legal wrangling exposes a side of the cheery hospitality trade that guests and even hoteliers don't normally see — one rife with claims of corporate espionage, double-dealing and poaching of top performers.

"It's a very small-knit community where people know each other, and this sort of thing just isn't done," said Alan Reay, president of Atlas Hospitality Group.

Industry veterans say the suit is the ugly fallout from a lodging boom a few years ago, when investors were pouring money into expansion and hotel companies were scrambling for talent. Loaded with nearly $21 billion in debt from a leveraged buyout by private equity firm Blackstone Group, Hilton needed to deliver results.

"In my 15 years of practicing law in this area, I have not seen a case at this level," said Todd Sullivan, a lawyer with the firm Womble Carlyle in North Carolina, who specializes in trade secrets. "It's almost like Greek tragedy."

Klein's short Hilton career began soon after Blackstone bought the chain for $26 billion in 2007. The purchase put pressure on Hilton and its new chief executive, Nassetta, to expand beyond its 10 existing brands, which include the Waldorf Astoria and the Conrad Hotels.

Hilton had failed to get into the fast-growing boutique sector. Starwood's first W opened in 1998 in New York, and it quickly attracted stylish, young travelers who were willing to pay top dollar to enjoy the hotel's sultry lounges, individually designed rooms and trendy furnishings. Rooms there currently fetch as much as $750 a night.

Starwood founder Barry Sternlicht is credited for creating the W brand. But Klein, who served as the president of Starwood's luxury brands, became the force behind it after he was hired in 2003 from the fashion house Ralph Lauren. There, as senior vice president for marketing, he had helped pump up sales of Polo jeans and perfumes.

Klein declined a request to be interviewed. But hotel industry veterans say he stood out like a bolt of lightning in the conservative hotel industry with his artistic flair and colorful clothing. At the Berlin launch event he appeared tan and trim, sporting a goatee and a pink tie and vest.

"Ross is a flamboyant character," said Andrew Sangster, editor of Hotel Analyst. "In a very staid industry he looks, shall we say, unusual. And quite refreshing for it, frankly."

W was never the biggest brand — it currently accounts for just 35 of Starwood's 1,000 properties. But the niche is lucrative, and other chains hustled to catch up.

Court documents show that Nassetta began quietly recruiting Klein almost as soon as he took over at Hilton. Meanwhile, Nassetta's deputy pursued Klein's more straight-laced colleague, Amar Lalvani, a California-raised, Harvard-educated MBA who was responsible for overseeing the business side of W's global expansion.

Klein and Lalvani announced their departures from Starwood in May 2008, within a few days of each other.

"It was one of the biggest hiring coups in the industry that anyone remembers," said Mary Gostelow, editor of numerous hotel industry publications.

But Starwood said those defections cost it much more than talent. In his final weeks at Starwood's headquarters in suburban New York, Klein brought in a personal laptop to download company data, according to the lawsuit. He also packed boxes with "brand bibles," internal financial reports, demographic studies — "a veritable mother lode of computer and hard-copy confidential information," the lawsuit said.

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