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Starwood Hotels sues

Commercial know-how is a fiercely protected asset among any company’s cache. Small wonder then that Hilton Hotels Corporation (Hilton Worldwide) has lost its recent attempt to block litigation by Starwood Hotels & Resorts Worldwide. Red Carpet obtained court documents, filed in New York last week, detailing allegations of corporate espionage by two former Starwood executives. Sat Bal sifts through the evidence. (24 Jun 10)

Last week U.S. District Judge Stephen Robinson ruled that (plaintiff) Starwood’s evidence against Hilton Worldwide thwarted Hilton's motion to have the action dismissed.
Starwood’s allegations centre on the activities of its former executives, Ross Klein (president of Starwood's Luxury Brands Group) and Amar Lalvani who went on to join Hilton as global head of Luxury & Lifestyle Brand Development.
Documents relate how the two executives "had access to the most confidential and competitively sensitive Starwood luxury and lifestyle brands information."
On weighing up the submissions of the parties District Judge Robinson's Opinion & Order concluded that:
1. Starwood has sufficiently alleged that Defendants accessed its computers "without authorization" (sic) or in "excess of authorized access."
 
2. Starwood was not required to allege direct access of its computers by Hilton personnel.
 
3. Starwood has adequately alleged "damage or loss" under the Computer Fraud and Abuse Act (CFAA).
The employment contracts of Klein and Lalvani incorporated a "Non-Solicitation, Confidentiality and Intellectual Property Agreement" that prohibited disclosure of any sensitive information upon termination of their roles. As is common in employment contracts it also insisted on the return of such information when the executives left their jobs.
Starwood has sufficiently alleged that Defendants accessed its computers: 

Starwood claimed that contractual provisions were breached when Klein and Lalvani used their access to its computer systems to retrieve and copy huge volumes of sensitive documents both before and after moving to the employ of Hilton. Starwood also alleged that Klein failed toreveal that he had already signed an employment contract with Hilton two weeks prior to executing a "separation agreement" with his then employer, Starwood.
The enmity between Starwood and Hilton started last year when Klein and Lalvani were accused of developing a new Hilton brand called Denizen using confidential Starwood know-how and proprietary information. In effect, the plaintiff saw the claimed misappropriation as giving Hilton an unfair advantage in accelerating the time taken to develop its new brand. 
Starwood also points at a letter alleged to be from Lalvani to Steve Goldman, Hilton president of global development and real estate, indicating possible collusion. The court documents quote Lalvani as writing: "Other idea is to bring over the core W team, which has created an enormous amount of value and is very loyal to me, to build a new brand for you guys."  
The "W" refers to Starwood's upscale W brand of hotels.
Starwood was not required to allege direct access of its computers by Hilton personnel:
Hilton argued that it had not directly accessed Starwood's computer systems in breach of the Computer Fraud and Abuse Act (CFAA). However, District Judge Robinson ruled that the "actions of Klein and Lalvani were the actions of Hilton."
Starwood has adequately alleged "damage or loss" under the CFAA:
 
The court concluded that the CFAA defined loss as "any reasonable cost to any victim" and that Starwood was entitled to offer further evidence to support its claims. 
The court's decision simply gives Starwood judicial option to proceed with its action. As such Hilton asserts that it doesn't pre-empt the outcome of litigation.  

According to Hilton the "decision by the Court is a procedural ruling that has no impact on the ultimate outcome of the case or what the plaintiff must prove if the case goes to trial. The ruling merely allows the case to move forward to the next phase."

The dispute is equally relevant on this side of the Atlantic particularly in an industry with the employee migration of the events and hospitality sector. This is compounded by the scope for employees to use their contacts and experience to leave employment and set up businesses of their own.  

So, you're well-liked by clients, ambitious and clutching a lucrative book of industry contacts. What's to stop you using these aces to pursue that dream new business or promotion? The contractual answer is probably the 'restrictive covenants' that lurk in your employee contract.

Restrictive covenants largely lie dormant until employees jump ship and then they can manifest themselves mainly in the following virulent forms:

Area covenants seek to prevent former employees from competing in, or near, the same territory. So, if you polished your craft with a company which organises film premieres, don't be too surprised if their covenants try and prevent you plying your new trade within a certain radius of the Odeon Leicester Square.

Non-solicitation covenants aim to prevent you luring talent (as in the Starwood matter) and clients from your former employer.

Non-dealing covenants go beyond the lure. They simply stop you taking on the former employer's clients even if said clients approached you rather than vice-versa.

Of course, the law being the law means that the above isn't bullet-proof and everything turns on the facts of each matter; success or failure lies in the legal drafting. If it's too restrictive or unfair the employer risks losing out. 

While the Starwood v Hilton matter is at a relatively early stage the industry is sure to be watching developments. The action serves as a salutary reminder of non-compete provisions and what is, and isn’t, permissible upon migrating to new employment - whatever the country of legal jurisdiction or the size of the company.

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