May 4 2009
Ross Klein and Amar Lalvani, two former employees of Starwood Hotels & Resorts Worldwide, were hired by Hilton Hotels Corporation in the summer of 2008. A suit filed by Starwood alleges that its two former executives took with them more than 100,000 electronic documents that contained proprietary information that Hilton then used in creating its new Denizen hotel chain.
In developing a concept for a new chain (Denizen is geared at the high-end market), companies spend years and millions on studying consumer needs and preferences, social trends, lighting, costs, food choices, and even fabrics and designs. The suit alleges that all of Starwood’s preliminary work on its developmental plans was taken by the executives to Hilton and that its concepts made their way into the Denizen brand. The suit maintains that the two executives sent the documents to Hilton via e-mail and through document shipments.
How Starwood uncovered the alleged theft is an interesting story of serendipity. Starwood had begun an arbitration proceeding against Hilton for its recruitment of 8 Starwood employees. While Hilton’s in-house legal counsel was preparing for that arbitration, he discovered bundles of Starwood documents in the files of Mr. Klein and other Hilton employees. Hilton then sent the electronic files and documents back to Starwood. There were 8 boxes of materials mailed to Starwood in February 2009. Hilton’s general counsel said in a cover letter that he did not think the information was proprietary or confidential but that he was sending them back as a precaution.
However, Starwood noted that its files included its development plans for its “zen den” that it was going to put in its upscale “W” hotels. Hilton’s development plans for Denizen referred to it as their “den of zen.”
The Starwood complaint also alleges that the two men took along Starwood’s strategic marketing plans and that Starwood has heard from existing customers that Hilton has been approaching them using the same tools and marketing techniques that Starwood has used with them.
What are the rights of companies on proprietary information? What are the rights of companies in terms of enforcing covenants not to compete against employees? Evaluate the ethics of Hilton in hiring the two men from Starwood.