Whacking the Windmill: Sinovel Indicted, Next Stop U.S. Federal Court

July 1, 2013

If you’re an environmentalist and into renewable energy, you might want to sit out this discussion about IP theft allegedly perpetrated by China’s wind turbine behemoth Sinovel. This story hits on some familiar themes, including misappropriation of U.S. IP by a Chinese company, tough competition in the clean energy sector, and even our old friend cybersecurity. Well, the last topic is a bit of a stretch; there was no hacking going on here, just some old fashioned unauthorized downloading of software.

Fun stuff. The facts may sound familiar, but in this case at least, it appears as if there is plenty of evidence of support the allegations. I’ll first quote liberally from the plaintiff’s press release and then circle around later to why a lot of this is probably true:

Following an investigation by the Federal Bureau of Investigation (FBI), the DoJ today charged Sinovel and two of its employees with the theft of Massachusetts-based AMSC’s proprietary software code and the use of that intellectual property in four 1.5 MW Sinovel turbines that have been installed in the Massachusetts towns of Charlestown, Fairhaven, and Scituate.

This is not some run-of-the-mill IP civil case, but a federal criminal indictment. If this doesn’t go well for these Sinovel guys, they are looking at prison time, perhaps for decades. The allegation is that two Sinovel employees paid a AMSC employee to illegally download source code, which was then used by Sinovel without compensating AMSC.

The press is using different terminology to describe the facts here, but it looks to me like we’ve got two things going: a theft of proprietary information and copyright infringement. I’m not sure whether the latter is part of the federal indictment as everything I’ve read about has focused on the theft. As a lawyer working for a U.S.-based software company in China, you can imagine that I’m more than a little interested in a case like this.

The two Sinovel guys, by the way, are not low-level flunkies, but rather the deputy of R&D and the “technology manager” (not sure if this is equivalent to a CTO). They allegedly solicited an AMSC software engineer based in Austria to download the source code from a U.S. server. Apparently he used Gmail to transfer the file, which is rather ironic given Beijing’s distaste for this particular Google product. But hey, whatever gets the job done, huh?

You’d think that SInovel and these folks involved would try to keep a low profile to avoid suspicion, but no, that didn’t quite happen:

Karabasevic [the Austrian guy], who traveled to Beijing regularly as part of his work for AMSC, allegedly did so in March 2011 and resigned from the company just days layer.That same month Sinovel stopped paying for shipments from AMSC, according to the indictment. As a result, AMSC, which counted on Sinovel for almost 80 percent of its business, was forced to lay off about half of its workforce, and the company’s market value dropped to $200 million from $1.6 billion. (Asian Lawyer)

Ouch. What do you call a company that relies on a single customer for 80% of its business? I guess I’d call them “vulnerable.”

I’ve been careful to use “alleged” in my description of the facts, but keep in mind that Mr. Austrian Software Dude has already been found guilty of all this; an Austrian court got him in 2011 for the theft, and he has turned over quite a bit of juicy evidence against Sinovel. The charges are alleged, but the evidence looks mighty convincing so far, including the following:

The evidence includes contracts, personally authorized by Sinovel’s then chairman and CEO and current director, Han Junliang, promising to pay Karabasevic in excess of $1.5 million (approx. 11 million RMB). In addition, law enforcement has obtained the e-mails containing the actual intellectual property transfer as well as evidence from multiple wind farms in both China and the  United States demonstrating that Sinovel has been utilizing the stolen software to upgrade its wind turbines.

Wow. If they really have that kind of evidence (and it sounds like this already came out in the trial in Austria), well, Sinovel might have a tough time getting out of this. Good luck, Vinson and Elkins. By the way, who writes contracts documenting the solicitation of IP theft? If Karabasevic didn’t perform, were they going to sue him for breach of contract?

One last issue here. Apparently back in 2011, AMSC attempted some local dispute resolution here in China. Yeah, you can guess how that turned out. The company later said that they tried to get the cops to investigate (that rarely works over here) and also filed several civil cases. I’m curious about those and wonder whether this was simple local protectionism (Sinovel could be the poster child for China’s key clean energy sector) or if AMSC’s case here was simply too thin. Given that a lot of this evidence didn’t come out until the trial of Karabasevic in Austria, it might just be that their China suits failed on the merits.

Bottom line: another boost for the “China steals U.S. IP” meme. Moreover, seeing as how this involves a key industry sector, this story will no doubt be used as yet another illustration of China’s aggressive industrial strategy, although we have no indication that the Chinese government was at all involved in this. I’m thinking that Jim McGregor is going to get a few TV interviews this week.

I’m going to resist the temptation to play the “what does it all mean?” game. This is not the first commercial espionage case we’ve seen involving Chinese companies of course, but until we see some evidence of a government conspiracy, I’m not going there.

4 thoughts on “Whacking the Windmill: Sinovel Indicted, Next Stop U.S. Federal Court

  1. Jay

    This looks like a done deal – and I hope Sinovel gets cooked well over this – afterall, they stole not only the core of a company but a whole lot of jobs. I just hope the American company can recover and take back the market. Sinovel will probably just change their name and keep going. I wouldn’t buy anything from them.

    By the way, are the Sinovel executives in custody?