• Starwood sticks legal knife into Hilton

The spectacular lawsuit launched last week by Starwood Hotels against Hilton is an eye-popping read. Hilton is being accused of "corporate espionage and the looting through computer fraud of a mountain of information".

And the fall out for Hilton looks severe: many people close to this case believe it may result in Hilton exiting its entry into the lifestyle hotel space entirely.

The complaint filed by Starwood names Hilton and its executives Ross Klein and Amar Lalvani. It alleges a plot in which Hilton began recruiting Klein in February 2008 and Lalvani a month later, and that led the two to start work at Hilton in June 2008, bringing with them much of Starwood's secrets.

Among the materials said to have been pilfered are Starwood's strategic development plans for W, St Regis and the Luxury Collection; the principal term prioritisation worksheets which contain details of Starwood's negotiations with owners; property investment plans; confidential marketing studies; project approval requests which set out fee structures and the like; other confidential brand documentation such as handbooks; and various non-public presentations and contact details of key individuals.

Eight other former Starwood employees now on Hilton's payroll were named: Christopher Kochuba; Erin Shaffer; Jeff Darnell; Stephanie Heer; Erin Green; Elie Younes; Leah Corradino; and Susan Manrao.

Klein and Hilton were accused of having recruited the eight in violation of his $600,000 plus exit deal from Starwood. Arbitration was started by Starwood against Klein for this solicitation back in November 2008.

Compounding the situation are the allegations of data theft. In February this year, Hilton sent back to Starwood eight boxes of material which, including those on electronic media, amounted to 100,000 files.

The complaint describes the data taken by Hilton as "a veritable mother lode of computer and hard copy information". It further alleges that the "brand-in-a-box" information provides Hilton with the means to bring "a competitive hotel chain to market expeditiously and without expending tens of millions of dollars and many years on development".

Starwood wants Hilton to be ordered to axe the Denizen brand launched by Hilton in March and all documents relating to its promotion and roll out "thus requiring Hilton to start over without the benefit of its theft of Starwood confidential information".

Hilton has responded by stating that the law suit is without merit. But it has suspended Klein, Lalvani and others in its luxury and lifestyle team on paid leave.

In addition to the Starwood legal action, Hilton is being chased by the federal authorities. It has received a federal grand jury subpoena for documents related to Starwood's allegations.

This threat of criminal charges is being taken seriously by Hilton. People close to Hilton have hinted that the company may end up walking away from the whole entry into lifestyle hotels. One insider described Lalvani and Klein as "toast".

On Starwood's part, there seems genuine frustration that the situation has led to the legal battle. CEO Frits van Paaschen told USA Today that Starwood would fight to protect "our secret sauce".

He went on to argue that his experience in two other highly competitive brand driven industries – athletic shoes and beer – had made him welcome healthy competition that led to innovation and superior products.

"In this case, however, the actions taken were not done in the spirit of fair competition. This situation is unprecedented in the hotel industry. I hope you understand that this lawsuit is not something we wanted to do – we simply were left with no other option," he concluded.

For the wider industry, the lawsuit offers two things: the first is the schadenfreude of watching two of the industry's Titans slug it out in court – there is already plenty of titillation available in the document; and the second, a more important takeaway, is just how important branding has now become.

Those seeking titillation should download the full 91 pages of Starwood's complaint. Among the items are the details of Klein's appointment in 2005 on a salary of $400,000 and Lalvani's October 2006 hire on a base salary of $250,000 plus a cost of living allowance for the first year of $50,000.

Given that both salaries will have been pushed up significantly in the move to Hilton, there will be plenty of development executives who will be feeling a little short-changed by their own deals.

Moving on to the more substantive issue of branding, it has to be hoped that the almighty legal clanger that Hilton has made does not discourage it and other big brand owners from pursuing individuals like Klein.

There has been a considerable amount of snide commentary about him, in particular questioning what he brings to the hotel business. But in many ways, it is precisely what he does not bring to the hotel business that is his strength.

His background in retail and focus on consumers' aspirations rather than functional needs is precisely where brands in the hotel business ought to be heading.

When I met up with him in Berlin in March, he wanted to talk about environments, experiences and transactions. It was not the usual mantra of doing service better than competitors.

It is also wrong to suggest that Denizen is simply a rip-off of W. It may be that Klein has taken ideas from where W and other Starwood brands were headed (I'll leave that to the lawyers to slug out) but Denizen is more a reaction to W than a copy.

Internal communications about Denizen described it as being an "antidote to attitude", a clear steer away from the cooler-than-thou approach of W. For the wider Prestige portfolio that Klein was put in charge of by Hilton, which includes the venerable Waldorf=Astoria brand and Conrad, his message was that he wanted "elegance not arrogance".

Compared to W, the Denizen brand was also much more focused on flexibility in terms of fit-out. Brand standards are set through soft furnishings rather than millwork (the carpentry) to enable rapid updating.

Klein talked about the brand roll-out as being like merchandising in retail and offering developers a set of pre-approved ingredients. The brand would offer a fashion and seasonality element.

Although the launch party in Berlin was something of a flop given the overcrowding, I came away from the press briefings with a sense of Hilton genuinely taking the lifestyle space forward. Denizen looked like a sensible move by Hilton, likely to become a valued 12th member of its brand portfolio and plugging a key area of weakness.

There remains a sense of caution in the hotel industry about such brand endeavours, however. Talking to Hilton CEO Chris Nassetta at the launch party for Denizen left me feeling that even he had lingering doubts about how far the brand ethos of industries like autos could be taken in hotels.

But, whatever the outcome of this legal spat, there is going to be much more heard about branding hotels in the way Denizen was.

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