Federal prosecutors have asked a federal court for a stay of Starwood Hotels & Resorts’ corporate espionage suit against Hilton and two former Starwood executives, a move that could indicate criminal charges are likely.
The U.S. Attorney’s Office in Manhattan asked for a six-month halt to the lawsuit, saying Starwood’s aggressive discovery process was threatening to undermine its investigation.
Kelly Scott, head of the employment law department at Ervin Cohen & Jessup in Los Angeles, said the rationale for the request for a stay was "that an investigation would be hampered if the people that were the subject of the investigation knew what was being discussed."
"What they are doing is saying, ‘We are pursuing an investigation of possible criminal charges, and we do not want to turn over our files at this point.' "
Jeffrey K. Riffer, a partner with the Los Angeles firm of Elkins Kalt Weintraub Reuben and Gartside, said the move "means that there are likely to be criminal indictments."
Scott was more hesitant to speculate on the possibility of criminal charges in the case.
"These cases are difficult to prove from a criminal standpoint," he said. "But I can’t say it’s unlikely, because the mere fact that there is an investigation would probably mean there is enough there to be of interest.
"I think it’s fair to say they don’t get involved unless they think there is something to it. They’re not always right. … But from the point of view of Hilton or some or all of the potential defendants, this would be a very serious issue — so serious, in fact, that it may stifle numerous aspects of the civil case."
One threat, he said, is that witnesses who fear they might be prosecuted will start invoking their Fifth Amendment protection against self-incriminating testimony, "and they won’t be able to answer questions."
Starwood sued Hilton last April, accusing former executives Ross Klein and Amar Lalvani of stealing more than 100,000 electronic files before and after they left Starwood to join Hilton.
The suit alleges they used the information in the development of Hilton’s Denizen lifestyle brand. Hilton put Denizen on hold after the lawsuit was filed.
In January, Starwood filed an amended complaint alleging that Hilton CEO Christopher Nassetta and numerous other Hilton executives knew that Klein and Lalvani were using confidential Starwood information. It also claims that Lalvani was acting as a corporate spy while he was still employed by Starwood.
The amended complaint was based on new evidence uncovered during discovery.
In their latest filing, prosecutors state that Hilton, Klein and Lalvani — the named defendants in the Starwood suit — have agreed to the stay of the civil case but Starwood has not.
Starwood said it would not be filing a response to the motion but had no further comment.
In its request for a stay, the U.S. Attorney’s Office said Starwood was using the discovery process to seek information about the prosecutors’ investigation.
The filing argues that potential criminal defendants could gain access to information in the prosecutors’ investigation that could hinder its ability to prosecute the case.
"A stay is appropriate because, among other things, the plaintiff in this action has actively pursued discovery with a view towards finding out what has occurred between various witnesses and the United States Attorney’s Office," the request for a stay states.
"Moreover, potential defendants in the criminal case would otherwise be able to use the broad civil discovery rules to obtain information that they could not obtain in the criminal case and then tailor their testimony and defenses to conform with the government’s proof."
In seeking the stay, prosecutors cited federal rules and past court rulings in arguing that "as a general rule, courts have allowed the government to intervene in civil actions — especially when the government wishes to do so for the limited purpose of moving to stay discovery."
Still, Scott said, such requests are unusual. Normally, he said, once a civil case is filed, prosecutors let it run its course on the theory that the parties will work it out and prosecutors can deploy their resources elsewhere.
"So something caught their eye," he said. "And I can tell you this: For it to have progressed to this point means that they were into this long before this suit was filed, in all likelihood. And one might assume that someone was feeding them information, because they don’t find this kind of stuff on their own."
The filing claims the government has a "discernible interest in intervening in order to prevent discovery in a civil case from being used to circumvent the more limited scope of discovery in the criminal matter."
"In sum, the government will suffer irreparable prejudice if the parties are permitted to obtain civil discovery prior to the conclusion of the government’s criminal investigation," the filing argues.
"It would be exceedingly unfair to permit the litigants to reap the fruits of the government’s investigation to obtain discovery that may jeopardize both the investigation and any future prosecution."