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Criminal Charges Mark New Phase in Bellwether U.S.-China Intellectual Property Dispute

Justice Department

SOURCE: AP/Alex Brandon

The Robert F. Kennedy Department of Justice Building is seen in Washington.

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Today the U.S. Department of Justice announced that it is filing criminal charges against Sinovel Wind Group, one of China’s largest wind turbine manufacturers, for stealing trade secrets from AMSC (previously American Superconductor Corporation) and then selling that stolen technology to customers in Massachusetts. This new announcement is the latest twist in a story that has been unfolding since AMSC first found out about the alleged Sinovel theft two years ago. Since then, AMSC has filed multiple lawsuits in Chinese courts, but despite an unbelievably clear trail of evidence, the Chinese cases are all languishing without restitution.

Chinese courts answer to the Chinese Communist Party, so court cases are by definition subject to political influence. The question that always arises is what form that influence will take. Party leaders could order the courts to side with Sinovel regardless of the facts, or they could order a fair trial. Unfortunately for AMSC, Sinovel has been backed by serious political heavyweights in China—including the son of China’s former premier—and those connections have made Sinovel almost untouchable.

This long-running case calls into question what U.S. companies risk when they bring clean energy technologies to China, and what the U.S. government should be doing to protect U.S. firms and the U.S. economy from this type of technology theft. Those questions should certainly be on the agenda when Secretary John Kerry and Secretary Jack Lew meet their Chinese counterparts to discuss clean energy cooperation two weeks from now at the Security and Economic Dialogue in Washington, D.C.

High-stakes corporate espionage leads to lost jobs

AMSC first partnered with Sinovel in 2005, and it initially appeared to be a partnership made in heaven. AMSC makes the electrical systems that operate wind turbines. Sinovel could produce the turbines but not the high-end control technology, so the companies joined forces. By 2010 AMSC and Sinovel had signed around $700 million USD in multiyear purchasing contracts encompassing an array of high-end electrical systems and components.

The Sinovel-AMSC partnership was mutually beneficial, but it was also a perfect example of the traditional Sino-foreign business model that Chinese policy planners are trying to move their nation away from. AMSC was providing higher-value-added components and earning good returns for every wind turbine sold. Sinovel, on the other hand, was specializing in low-cost manufacturing, which provides lower profit margins for the company and lower wages for its workers.

Beijing would like to see more Chinese enterprises move up the value chain to the high-technology side of that equation, and Chinese leaders are constantly rolling out policy incentives to encourage that, but technology catch-up is a difficult business. It would have taken Sinovel engineers years to develop the capabilities they would need to produce the components the company was buying from AMSC, and Sinovel executives were impatient. Instead of making long-term investments to develop those technology capabilities down the road, Sinovel apparently decided to shortcut the process by stealing from its business partner.

Intellectual property theft is a major risk to companies doing business in China, so most foreign companies go to great lengths to protect their engineering secrets. AMSC was no exception. Instead of manufacturing proprietary technology in China, AMSC operated out of secure facilities in the United States and Europe. Such facilities are only as secure as their employees, however. Sinovel found a disgruntled engineer working at an AMSC facility in Austria and offered him more than $1.5 million for AMSC proprietary source codes. The engineer took the deal, and Sinovel brought him out to Beijing, set him up in an apartment with unlimited friendly female company, and used the stolen codes and the engineer’s expertise to replicate the AMSC control system.

As soon as Sinovel had the AMSC technology in hand, it turned away a multi-million-dollar shipment from AMSC, refused to pay for shipments it had already received and refused to accept further contracted shipments, claiming that the AMSC equipment was defective. In reality, as AMSC soon discovered, Sinovel had set up a subsidiary to manufacture bootleg versions of AMSC’s technology, so as far as Sinovel was concerned, the originals were no longer needed.

Sinovel was AMSC’s biggest customer, accounting for around two-thirds of AMSC’s revenue, so the alleged theft was devastating. As of June 2013, AMSC stock values have fallen by around 90 percent, and the company estimates its total damages (including lost revenue from the unfilled supply contracts) exceed $1 billion. Due to those losses, the company has had to lay off more than 60 percent of its workforce.

China’s court system is the real problem

In any nation, there is always a chance that companies will behave badly. The United States has certainly had its own share of Enron-type corporate scandals. What separates nations is how such scandals are handled, and therein lies the problem with China: it simply does not have a fair and impartial legal system. So when Chinese business partners violate contracts or steal technology and try to pass it off as their own, companies like AMSC can find themselves without a good avenue for restitution, particularly if the Chinese company has no major assets abroad.

AMSC is fighting its way through the Chinese system as best it can, but that fight has not produced restitution as yet. In September 2011 AMSC filed multiple lawsuits against Sinovel in Chinese courts seeking a total of $1.2 billion in damages for theft and breach of contract. Two years later, only two cases have actually moved forward, albeit in different directions: a $200,000 copyright suit filed against Sinovel and Dalian Guotong Electric Co. (a Sinovel subsidiary) in Hainan Intermediate People’s Court, and a $6 million copyright suit filed against Sinovel in Beijing Intermediate People’s Court. Sinovel convinced Hainan courts to dismiss the $200,000 case but failed to convince Beijing courts to dismiss the $6 million case. Currently both cases are under Supreme Court review: AMSC has appealed to China’s Supreme Court to reverse the Hainan dismissal, and Sinoval has submitted its own appeal asking China’s Supreme Court to dismiss the Beijing case. China’s Supreme Court held an initial hearing on both cases last month, but no decisions have been announced. Meanwhile, AMSC has spent more than $6 million in legal fees and has been forced to lay off employees to keep afloat.

In the west, these cases would be open-and-shut wins for AMSC. The rogue engineer has already pled guilty in European courts, testified to his collusion with Sinovel in the theft, and served jail time for his crimes. AMSC has every form of evidence a copyright plaintiff could possibly hope for, including monetary transfers to the engineer from Sinovel and data transfers to Sinovel via the engineer’s Gmail account.

In the United States and Europe, that evidence led to swift indictments. In China it led to an expensive legal quagmire. Without major financial restitution from Sinovel, AMSC could go out of business, and since Sinovel’s primary assets are in China, Chinese courts are the primary battlefield.

AMSC’s mounting losses call into question how closely U.S. firms can safely engage in China’s clean energy markets

This case highlights the risks American companies face doing business in a country that does not share our same level of legal and regulatory standards. As the world’s largest energy consumers, the United States and China have much to gain from working together on clean energy development. Challenges remain, however, in figuring out what types of cooperation make sense for both sides. Since China has such a booming domestic market, partnering with Chinese firms to supply Chinese customers can look irresistible, but the potential risks can sometimes be as high as the rewards.

Chinese leaders have committed to do more on the issue of intellectual property rights. Earlier this month, Chinese President Xi Jinping promised a group of global investors that “the Chinese government will, as always, protect the lawful rights and interests of investors, strengthen the protection of intellectual property rights and provide quality service to foreign companies.”

However, U.S. companies should judge the Chinese government by its actions, not its words, and the AMSC-Sinovel dispute is a great test case. U.S. leaders have discussed the case with their Chinese counterparts at the highest levels, so Beijing cannot plead ignorance. If this case is not resolved soon, U.S. companies should view this as a signal that despite Beijing’s promises, the Chinese market remains high risk for high-end technology ventures.

U.S. leaders should use the upcoming Security and Economic Dialogue to press these intellectual property concerns and ask Beijing to show solid action. If China’s new leaders respond by taking steps to address this and other languishing intellectual property cases, it would certainly signal more positive prospects for U.S.-China technology cooperation.

Melanie Hart is a Senior Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress.

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