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Hotel Wars: Drama and Intrigue Behind the Starwood
 Lawsuit Filed Against Hilton

By Nathaniel Popper, Los Angeles TimesMcClatchy-Tribune Regional News

June 6, 2010 --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.

The information quickly circulated among top brass at Hilton after Klein's arrival in Beverly Hills, the complaint said. Starwood alleges that 44 executives at the highest levels of Hilton, including Nassetta, read the purloined materials and used them to develop Denizen, knowing full well that they were the intellectual property of a competitor.

According to the lawsuit, one Hilton executive sent Klein an e-mail that said "I am voraciously reading these ... W Residential Development Kits"; another advised discretion: "I'm concerned that these are all Starwood documents"; and yet another urged Klein to speed the "Hiltonizing" of documents, seemingly a reference to hiding the origin of the material so it could be shared with "the Exec Group ASAP."

Lalvani funneled confidential information to Hilton while he was still employed at Starwood, according to the complaint, including plans for a new W in Thailand. "Let's discuss protocol during my transition on deals like this so we don't miss them," Lalvani said in an e-mail quoted in the lawsuit. "This is going to be fun."

Klein and Lalvani also lured some of their old colleagues from Starwood to Hilton, and Lalvani sent an e-mail to one of the defectors asking him to bring along more Starwood documents, the complaint said.

A Hilton vice president blew the whistle in November 2008. In an e-mail cited in the lawsuit, the employee wrote that Klein had "put some of these highly proprietary documents on Hilton's internal computer server, and instructed Hilton personnel to use these proprietary Starwood documents as a detailed plan for them to follow."

Around the same time, Starwood attorneys sent a letter to Hilton requesting records related to the spate of employee defections. Hilton launched an internal investigation.

Still, work on Denizen proceeded apace. At the March event in Berlin, there were few signs of any trouble. Nassetta publicly praised the men.

"Our team has worked literally tirelessly, led by Ross Klein, the creative genius behind this fabulous brand, and Amar Lalvani, who has been running around the world," Nassetta said before announcing the Denizen name.

Barely a month later, Starwood filed its complaint in federal court. Hilton denied wrongdoing and vowed to press ahead with Denizen. But days later it agreed to scuttle its plans for the new chain. It also fired Klein, Lalvani and several other former Starwood employees.

Starwood has not let up. The first complaint accused only Klein and Lalvani of wrongdoing; a second, filed early this year, expanded its allegations to include dozens of Hilton executives including Nassetta and his corporate secretary and general counsel Richard Lucas. Starwood has asked that Hilton pay unspecified damages and that it be kept out of the W's lifestyle and luxury sector.

Hilton attorney Aaron Marks said that Hilton warned Klein and Lalvani against bringing any proprietary Starwood materials with them.

"There's absolutely no evidence that anyone at Hilton encouraged, condoned or knew about former Starwood employees' bringing over confidential materials belonging to Starwood before it happened," Marks said. "From Hilton's perspective, these guys shouldn't have brought with them any of it."

The U.S. attorney in Manhattan has empanelled a grand jury to consider whether the actions of the Starwood defectors were criminal. This February, the prosecutors filed a motion with the judge overseeing the civil lawsuit filed by Starwood, asking for that case to be put on hold while the criminal prosecutors finish their probe into potential fraud, theft of trade secrets and conspiracy.

Klein still lives in Los Angeles. LinkedIn, a professional networking site, lists him as an independent marketing and advertising professional. The same site indicates that Lalvani has moved back to New York and founded One Day Partners, a travel consultancy.

A lawyer for Klein, Ronald Nessim, said: "This case is much more nuanced than Starwood's exaggerated and misleading complaint suggests."

A lawyer for Lalvani, Christopher Morvillo, said: "Starwood's complaint strings together half-truths, inaccuracies and hyperbole into a colorful but ultimately misleading story. Amar acted at all times consistently with his stellar reputation in the industry and looks forward to the truth coming out."

Hilton moved its headquarters from California to a suburb of Washington, D.C., last year, adopted a new logo and hired a new executive to explore the boutique sector. In the meantime, the privately held company has struggled under its debt load; it recently negotiated a $4-billion reduction with its lenders.

Like other hotel firms, Starwood has felt the economic slowdown. But the W chain has continued to expand. In January the newest W opened in Hollywood, and five more openings are planned for this year in places as far-flung as St. Petersburg and Bali. The parent company's share prices have been rising over the last year.

Industry insiders said the brief glimpses of Denizen left many with the belief that W might have had a worthy competitor.

"It was genuinely quite different," said Sangster. "How effective it would have been, no one will ever know."

nathaniel.popper@latimes.com

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Copyright (c) 2010, Los Angeles Times

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