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G-Men’s Interest in Hilton’s Alleged Trade Secret Theft Highlights Importance of Trade Secret Policies

Posted in Trade Secrets

by Zachary Wadlé

Hilton Hotels Corporation and two high-ranking executives are facing a civil lawsuit and a federal grand jury investigation stemming from allegations that they developed Hilton’s new luxury lifestyle brand, “Denizen,” using proprietary information stolen from rival hotel company Starwood.

The civil complaint filed in federal district court in White Plains, New York, alleges that Ross Klein and Amar Lalvani, two former Starwood executives who joined Hilton last summer, stole more than 100,000 electronic and paper documents containing Starwood’s trade secrets.

According to Starwood’s complaint, Hilton began courting the Starwood executives in February and March 2008. It was at that time, the suit alleges, that Klein “secretly misused his position” at Starwood to compile and steal confidential information. In their last months at Starwood, the two executives allegedly smuggled out thousands of confidential documents via email and in direct shipments from Starwood to their homes and to Hilton. Among the information Starwood claims Klein and Lalvani took was a concept called the “zen den” that Starwood planned to implement at its line of “W Hotels.” Hilton executives have referred to Hilton’s “Denizen” brand as a “den of zen,” the complaint alleges, adding that, “within Starwood the name has a familiar ring.” “This is the clearest imaginable case of corporate espionage, theft of trade secrets, unfair competition and computer fraud,” Starwood asserted in its lawsuit. “The sheer volume of the theft is extraordinary, and may be unprecedented. The materials taken to Hilton by Klein and Lalvani are among Starwood’s most competitively sensitive information.”

In a corporate statement responding to Starwood’s civil suit, Hilton said “it believes this lawsuit is without merit and will vigorously defend itself. We fully intend to move forward on the development of our newest brand, Denizen Hotels.”  However, as details of the grand jury investigation recently became known, Hilton changed its tune and agreed to a court injunction in the civil case halting development of the Denizen brand and placed Ross Klein and Amar Lalvani on paid administrative leave, along with members of their team.

The Hilton criminal investigation makes clear that, in extreme cases, misappropriation of trade secrets can go far beyond the civil courtroom and into the criminal justice system. Trade secrets are protected under both federal and state laws. Although the statutory definitions vary somewhat, these statutes all reflect a similar understanding of what constitutes a trade secret, and what constitutes misappropriation of a trade secret.

The Uniform Trade Secrets Act ("UTSA"), which has been enacted in many states, and other state trade secret statutes provide civil penalties for the misappropriation of trade secrets. Liable parties can be required to pay all damages resulting from the misappropriation, as well as, in some cases, multiple damages or punitive damages. In addition, the defendants can be enjoined from using or disclosing the trade secrets. 

The 1996 federal Economic Espionage Act ("EEA") (18 U.S.C. §§ 1831-1839), as well as statutes in various states, including California, can also impose criminal liabilities, including heavy fines and prison terms, for theft of trade secrets. The EEA imparts criminal liability for the theft or misappropriation of trade secrets as well as any attempt or conspiracy to steal or misappropriate trade secrets. Sections 1831 and 1832 of the EEA are directed to different types of defendants. Section 1831 specifically punishes someone who intends or knows that the violation of the Act will benefit a foreign government, instrumentality, or agent, as those terms are defined in Section 1839. In contrast, Section 1832 targets trade secret theft more generally, without regard to its benefits to a foreign entity. Section 1831 applies to the theft of either products or technical skills unrelated to a product, while Section 1832 is more limited to addressing theft of a trade secret "that is related to or included in a product." Each statute uses broad terms to embrace both direct and indirect theft of a trade secret, including its alteration or destruction.

Individuals and organizations convicted of violating Sections 1831 and 1832 are subject to severe penalties. Persons convicted of violating Section 1831 may be fined up to $500,000 or imprisoned up to 15 years, or both, while any organization that commits any offense prohibited by Section 1831 may be fined up to $10,000,000. A person convicted of violating Section 1832 faces a fine of up to $500,000 or a prison sentence of up to 10 years, or both, while any organization that commits any offense described in Section 1832 may be fined up to $5,000,000.

The considerable damages and criminal liability provided for by federal and state statutes underscore the importance of having a trade secret policy for your business. At minimum, all businesses should have written policies in place concerning the use of trade secrets. Instruct new employees that the company will not tolerate violation of prior confidentiality agreements and that employees should not use any information which might be deemed to be their former employer’s trade secret. Obtaining representations from new employees can serve as helpful evidence in defending the employer against an EEA claim. Strongly consider having new employees confirm in writing that they understand these obligations. Most importantly, take seriously any allegation of trade secret misappropriation. As Hilton has learned, the stakes in trade secret litigation can quickly escalate, and it is best to ensure that no misappropriation occurs in the first place.