• Starwood increases the pressure on Hilton

Starwood upped the ante in its legal tussle with Hilton over lifestyle brands this month filing an amendment to its legal complaint that was first aired nine months ago.

The new document opens up new fronts by including "dozens of Hilton's management" and by bringing the whole of Hilton's luxury and lifestyle portfolio into the fray.

The 86-page court document – which runs to 134 pages with exhibits – catalogues a succession of internal Hilton emails which saw Starwood documents passed among named Hilton executives.

The defendants remain Hilton, Ross Klein and Amar Lalvani but the scope of the allegations has widened, more details have been added, and the level of relief sought has been extended.

The complaint also lists how the vp of sales and marketing at Hilton's Conrad wrote a letter to Hilton CEO Chris Nassetta in November 2008 detailing the misuse of Starwood proprietary information by Klein and Lalvani.

Since the April 16, 2009 filing of the original complaint and the April 23 preliminary injunction, Hilton is said to have returned "hundreds of thousands of pages of documents and computer files".

It is this "mountain" of "undisputed evidence" that the new complaint says "demonstrates beyond doubt" that "Hiton's senior management personally induced and used Starwood employees to serve as corporate spies".

It further alleges that the stolen information was used across all of Hilton's luxury and lifestyle brands and that "Hilton management was aware of and tried to cover up Hilton's wrongful conduct".

The involvement of 44 Hilton executives is detailed including five who sit on Hilton's executive committee. The two most senior executives mentioned are Nassetta and Steve Goldman, the then president of global development who left in the summer of 2009.

Both Nassetta and Goldman come under fire for personally recruiting Klein and Lalvani. And Goldman allegedly received a file from Lalvani while Lalvani was still employed at Starwood. This is put forward as evidence of Lalvani being used as a "corporate spy".

Other emails cited in the evidence include one from Ed Russo, senior director of brand management for Hilton's Waldorf Collection in which he says he was reading the St Regis and W Residences development kits.

Similar allegations of either distributing or reading confidential Starwood material are made against a number of other Hilton executives such as Pretha Mani, senior director of brand growth within the lifestyle division; Bruce Sneller, director of new hotels and transitions; Richard Wolfman, senior director of lifestyle brand development; Antoon Hollants Van Loocke, director of brand standards for Conrad; and Robin Swierk, senior coordinator of brand performance at Conrad.

Hilton has not responded directly to the allegations but has said it rejects the Starwood case stating that it is without merit. And while other executives are named, Starwood is not widening its claim beyond Lalvani, Klein and Hilton itself. But the fact that Starwood has gone to the trouble of naming so many individual Hilton executives is an indication of how aggressively it is continuing to pursue its case.

Starwood is alleging that the documents were not just used for general corporate intelligence but formed the backbone of Hilton's push into the lifestyle category and informed the wider luxury segment.

And Starwood further alleges that senior executives knew what they were doing was wrong and tried to cover it up. In the filing is an email from Richard Mignault, vp human resources , where he tells Martin Lowery, senior vp of organisational development, that Hilton needed to be careful about sending Starwood branded stuff into a wider audience.

Molly McKenzie-Swarts, evp of human resources and a member of the exec committee, cautioned about the need for care on the specific issue of sending out Starwood branded stuff.

In an almost comically inappropriate remedy, it is alleged that Starwood branding was electronically scrubbed from documents by Susan Manrao, senior director of design so that they could be used.

Starwood says the amount of confidential information retrieved to date is "enormous and may be unprecedented". But they allege that Klein and Lalvani have more to "disgorge".

It is alleged that the wrongful use of Starwood materials "cuts across and infects all of Hilton's luxury and lifestyle brands and was known to and encouraged by Hilton's most senior management with the participation of dozens of members of Hilton's management".

The infection is alleged to have spread to other Hilton brands outside of the luxury group. And overall, the stolen information has "unjustly enriched Hilton and provided Hilton with an unfair competitive advantage".

Starwood now wants a "penalty box" stopping Hilton further developing its luxury and lifestyle segment; it wants court appointed monitors to ensure Hilton complies with injunctions; it wants Denizen, the lifestyle brand launched last March, "euthanized"; hotel owners to be told of Hilton's wrongdoing; plus the more usual injunctions against the behaviour, compensation and punitive damages.

And finally, Starwood is seeking that Hilton, Klein and Lalvani are held in contempt, civil and / or criminal, of the original injunction in April 2009.

The new filing details how Klein went about obtaining information. It alleges that he had his personal assistant and others digitise tear sheets of Starwood design work. Once done they, along with much other material, was sent to his personal email account.

Klein signed a contract of employment with Hilton which was faxed from Starwood's head office to Hilton and three days later he resigned. He did not tell Starwood he was joining Hilton. Rather, 10 days later, he shipped boxes directly to Hilton's head office.

Starwood says that Klein "fraudulently" induced Starwood to pay Klein $600,000 in severance pay. His severance agreement includes statements that he had not and will not disclose confidential information.

The case against Lalvani centres on his non-solicitation agreement and Goldman's alleged encouragement, as well as on his obtaining of confidential information.

The amended complaint describes the conduct Klein and Lalvani as intentional, outrageous and exhibiting a high degree of moral culpability. They are both accused of "criminal indifference" to their civil obligations.

HA Perspective: Oh dear. Last year it looked as though Hilton might be able to come to some equitable arrangement with Starwood. Now, however, it is clear Starwood wants to continue all out war and is not interested in taking prisoners.

Starwood and its legal team have succeeded in unearthing huge amounts of detail to support their allegations. It makes Hilton look arrogant and stupid.

To take documents from an employer with you when you leave is hardly unusual. But to put them up on a shared internal drive is plain daft.

This has probably encouraged Starwood to play tough. But it is interesting that the new complaint does not make either Nassetta or Goldman a defendant.

Separately, it has been reported that Goldman is no longer a target in its investigation into the matter. And his lawyer pointedly told the Wall Street Journal that the allegations in the new complaint are false.

Another interesting question about Starwood's complaint is how the company has obtained the emails it has used to compile the latest complaint? Has it conducted its own corporate espionage or has Hilton handed over the evidence in the material it sent Starwood's lawyers?

Not surprisingly, Hilton is not commenting on the case but it is understood to be continuing its talks with Starwood to settle. It needs to bring these to an early conclusion.

The big issue for Hilton is how to contain the damage. Starwood is now seeking to stop not just Denizen – which most people wrote off back in April when the first complaint was filed – but also Hilton's development in the entire luxury space.

If Starwood succeed, this would be a disaster for Hilton. But even if it does eventually win, in the meantime, owners will be seriously deterred from Hilton's luxury brands.

This week Hilton issued a press release stating that it had achieved a record by opening more properties in the last two year than any other equivalent period in its history. The overwhelming bulk of this growth – 302 hotels in 2009 and 327 in 2008 – came from outside of the luxury segment.

But luxury has been a key segment in terms of profile. Hilton said the luxury portfolio had increased more than 100% in the US and more than 50% internationally.

The company wide pipeline currently includes more than 900 hotels with more than 129,000 rooms. While the US has been a big success for Hilton – it claims it is now the number one in the US in terms of open and operating rooms – the pipeline is 37% international. In 2009, 50% of construction starts were outside the US compared to 17% two years ago.

A stagnation in the luxury portfolio will not make a serious dent on these numbers. And perhaps it might encourage Hilton to focus on being dominant where it matters – in the economy, midscale and upscale segments.

The legal battle with Starwood looks set to seriously tarnish the paintwork but the engine remains robust.

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