Restoration Hardware slaps Crate & Barrel with lawsuit over trade secrets

Dive Brief:

Restoration Hardware Inc. has filed a lawsuit against two former executives who left for rival home furnishings retailer Crate & Barrel Inc., Restoration told Retail Dive.
" RH has filed a lawsuit against Crate and Barrel and two former RH employees now working at Crate, including Doug Diemoz, the current CEO of Crate, and Kimberly Ahlheim, a manager in the food and beverage area," a Restoration Hardware spokesperson said. According to court documents filed Monday in California Superior Court in San Francisco County, " Diemoz, Ahlheim, and Crate have each committed trade secret misappropriation, and Diemoz and Ahlheim have violated contractual and other duties they owed to RH."
"RH has filed the lawsuit in order to protect its intellectual property," a spokesperson told Retail Dive. "RH has invested significant resources and time in developing its operational and growth strategies. We believe that Crate and Barrel is trying to gain an unfair competitive advantage by unlawfully obtaining RH’s proprietary information and trade secrets and that these former RH personnel have violated their confidentiality and contractual obligations to RH. We take this matter very seriously, are confident the facts support our position and look forward to vigorously pursuing these claims."

Dive Insight:

Restoration Hardware has been beset by inventory woes and some confusion around changes to its markdown strategy. Its Q3 net revenues increased 3% to $549.3 million, compared to a 10% increase and $532.4 million last year, while same-store sales fell 6%, compared to a 7% rise in the same period last year, beating the 12.8% decline expected by FactSet analysts.

Overall store revenues increased 9% to $306.8 million in the third quarter, compared to a Q3 2015 increase of 16%. Direct-to-consumer revenues decreased 3% to $242.5 million and represented 44% of total net revenues, Restoration Hardware said. Thomson Reuters analysts had estimated $637.6 million in revenue and $1.08 per share in earnings for the quarter.

Meanwhile, Crate & Barrel has faced its own challenges, with abrupt leadership changes in 2015 and a sense of rudderlessness since the 2014 death of longtime executive and board member Barbara Turf, who in her role as CEO and in other positions was known for leading the company with creativity and flair.

Enter Diemoz to give Crate & Barrel (which retains its solid reputation for affordable, European-style home goods and furniture) some new direction. Diemoz left his position as chief development officer at Restoration Hardware to become Crate & Barrel CEO in August 2015, and recruited Ahlheim to join his team there last year. The suit alleges that Diemoz and Ahlheim brought with them proprietary knowledge of RH's food and beverage operations, part of an experiment in Chicago to boost Restoration’s retail experience. (A request for comment from Retail Dive to Crate & Barrel was not immediately returned.)

The expertise and insight Diemoz gained at Restoration Hardware, while surely a selling point, was taken too far, according to this lawsuit. "Crate was keenly ware of the high growth that RH has achieved due to its more innovative approach to the home furnishings industry. Lacking its own formula for growth, Crate set upon a business strategy of recruiting away key senior leaders … to help revitalize Crate’s flagging business," the lawsuit reads in part. "In particular, Crate launched a systematic strategy to recruit a new CEO in 2014 by targeting a list of senior management talent from RH. Rather than invent its own growth strategy, Crate effectively sought to steal a page from the successful RH playbook."

Beyond touting its own success, RH lawyers also throw quite a bit of shade: "In contrast to RH’s meteoric revenue growth since the Great Recession, competitor Crate ... has experienced little revenue growth during this same time period. Some public reports state that privately held Crate’s revenue in 2007 was $1.3 billion, and its revenue in 2013 was $1.38 billion, showing a long period of slow to no growth in revenue. ... Crate began targeting RH personnel and RH strategies as part of a strategy to turn around Crate’s inferior performance and growth."

Restoration Hardware is especially focused on its food operations, an effort led by Ahlheim during her time there, and the retailer alleges that she was giving over secrets to her soon-to-be new employer while she was still at RH. Retailers of all stripes are increasingly turning to food concessions to attract customers and provide an enjoyable experience that allows them to linger at their stores: Target, Barnes & Noble, Kohl’s and Urban Outfitters have all tested various iterations of food concepts, from delis to upscale restaurants, to spice up their stores amid declining foot traffic as online shopping eats into brick-and-mortar sales.

“I know that there are two parts of retail that cannot be duplicated on the internet: One is food and dining, and the other is entertainment," Nick Egelanian, president of retail development consultants SiteWorks International, told Retail Dive last year.