Starwood Calls Foul on HiltonHotels' Battle to Own Sophistication May Have Inspired Espionage

Hilton's desire to match the success of Starwood's W franchise lies at the heart of this dispute over designs for another boutique hotel concept.
Hilton's desire to match the success of Starwood's W franchise lies at the heart of this dispute over designs for another boutique hotel concept. (By Mike Blake -- Reuters)
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By Michael S. Rosenwald
Washington Post Staff Writer
Saturday, June 13, 2009

Earlier this year, Hilton Hotels shipped eight boxes to Starwood Hotels and Resorts. Companies don't typically send much mail to their competitors, and Starwood's general counsel discovered something odd in the boxes: thousands of Starwood documents and electronic files.

Lawyers from Hilton, which is moving to Tysons Corner from Beverly Hills this summer, included a letter saying they found the material in the homes and offices of star employees the firm had recruited from Starwood. The material, according to the letter, had been reviewed and didn't seem all that sensitive. Hilton was returning it "in an abundance of caution."

Starwood's attorneys did not agree. They hit Hilton with a 91-page lawsuit alleging "the clearest imaginable case of corporate espionage," saying that "the sheer volume of theft is extraordinary, and may be unprecedented." The files included Starwood's strategic development plans and materials for a boutique hotel using the words "zen den." Hilton allegedly drew from the material, apparently using a little wordplay, in developing a hip new boutique hotel called Denizen.

"This complaint reads more like a novel," said Jeff Riffer, a Los Angeles attorney and former chair of the American Bar Association's trade secrets subcommittee. "It's pretty unusual that senior executives at one company are going to take a lot of documents and go to a competitor, where they appear to set up the same idea."

Hilton repeatedly declined to comment on the case, citing an ongoing federal grand jury investigation into the allegations. Legal experts say the company has taken the appropriate steps of returning the material, suspending development of the Denizen concept and placing the employees on leave. The case nonetheless is a distraction for Hilton as it prepares to move to the region.

Hotel industry observers say the case shines an unflattering light on the world of hotel branding, particularly the jostling by large chains to enter the lucrative lifestyle and boutique market, where the room rates are high, the buzz is scintillating, the decor is modish and pillow menus are standard. These hotels are not your father's Marriotts, and the competition surrounding them is extraordinary.

"This is all about trying to appeal to a younger demographic and all about issues of fashion," said Brad Hudson, a Boston University professor of hospitality marketing. "Everyone really wants one of these brands."

The segment's roots largely trace back to Ian Schrager, the proprietor of the Studio 54 nightclub who later became the creative godfather of boutique hotels. After being released from federal prison for tax violations, he opened a series of small, trendy hotels in New York during the 1980s. Starwood, based in White Plains, N.Y., piggy-backed on Schrager's style and adapted the boutique concept into the corporate hotel world, opening its first of more than 20 W hotels in 1998.

"When their concept was introduced, it was sexy, aspirational, and Starwood made it replicable," said Donna Quadri-Felitti, a New York University professor of hospitality and former executive at Loews Hotels.

The W's success helped position Starwood as one of the industry's most innovative companies. And inside the headquarters of its big competitors, such as Hilton and Bethesda-based Marriott International, executives toiled to match Starwood's success in the boutique space. "It is a model that many hotel competitors have sought to emulate, but that none have been able successfully to employ, let alone scale globally," the lawsuit says.

In 2007, Marriott executives essentially threw up their hands, admitting they didn't have the creative talent in-house to launch a boutique brand on their own. Instead, they stunned the hotel world by partnering with Schrager, perhaps the most opposite man in the world to 77-year-old chief executive Bill Marriott, to develop a concept called Edition. The first hotel in that chain is scheduled to open next year.

Now the pressure was on Hilton, which Blackstone bought in 2007 for $26 billion, to jump in. Last February, according to the lawsuit, Hilton chief executive Chris Nassetta recruited Starwood's Ross Klein to join Hilton and lead company efforts to get into the W's market share. At Starwood, Klein had served as chief marketing officer for W and later as president of the division overseeing the hotels. Hilton also snapped up another senior executive, Amar Lalvani.

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