Grand jury seeks Hilton papers in case alleging spying on Starwood

— -- Federal prosecutors are investigating allegations that Hilton Hotels spied on Starwood Hotels & Resorts and used the information to launch a luxury hotel chain.

Klein and Lalvani spearheaded Hilton's attempts to launch Denizen Hotels, a line intended to be Hilton's answer to Starwood's W Hotels chain. Klein was head of luxury and lifestyle brands, and Lalvani was head of development for the segment.

Hilton, the Beverly Hills-based hotel giant, said it has temporarily grounded Denizen's development. It also placed on paid administrative leave the employees in question, "pending Hilton's review of the situation," Hilton said in a release.

The subpoena, served by the U.S. Attorney's Office for the Southern District of New York, requests documents about Klein and Lalvani's hiring, as well as documents related to materials that Hilton returned to Starwood last February, Hilton said.

Federal prosecutors have the authority to pursue corporate espionage charges under the Economic Espionage Act of 1996, says Margaret Esquenet, an intellectual property lawyer at Finnegan Henderson Farabow Garrett and Dunner.

The subpoena is the latest twist in the surprising saga that pits publicly traded Starwood against Hilton, which was purchased by private equity firm Blackstone two years ago.

Last week, Starwood sued Klein, Lalvani and Hilton. In the lawsuit, it accused its former employees of stealing trade secrets to expedite Hilton's foray into the "lifestyle" market. Starwood, based in White Plains, N.Y., said that without those secrets Hilton wouldn't have been able to launch the Denizen brand in less than a year.

Hilton said last week that the lawsuit was without merit. It also said it intended to continue developing Denizen Hotels, a plan it reversed on Tuesday.