Feds charge Chinese firm with stealing technology of Mass. company AMSC

In a case that could have implications for US-China relations, a federal grand jury indicted Chinese wind turbine maker for stealing key technology from a Massachusetts firm.

The criminal charges — trade secret theft and criminal copyright infringment — escalate a two-year legal battle playing out in China between American Superconductor Corp. of Devens, which does business as AMSC, and Sinovel Wind Group Co. of Beijing, one of the largest wind turbine makers in the world. It may also add to one of the biggest sources of tension between the United States and China: the theft of intellectual property from American companies.

“The ongoing cases in China serve as a test for whether American corporations can depend on Chinese courts to address corporate espionage of intellectual property adequately,” said Mark Wu, an assistant professor at Harvard Law School. “Today’s indictment increases the pressure for Chinese authorities to act. If they don’t, the Justice Department is making clear that it will.”

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AMSC makes software that controls the operation of wind turbines and Sinovel was once its biggest customer, accounting for nearly 80 percent of its revenues. In March 2011, Sinovel suddenly stopped accepting shipments from AMSC, canceling contracts and devastating the Devens company, which has since cut nearly 60 percent of its global workforce.

Three months later, AMSC believes it discovered why: it found a replica of its software operating in a Sinovel turbine in China. The company later sued Sinovel for more than $1.2 billion in Chinese courts.

The US criminal case, ironically, stems from four 1.5-megawatt turbines Sinovel sold to Massachusetts customers in — each operating with the allegedly stolen software, according to the indictment. State records show that at least one of the turbines, at the Massachusetts Water Resources Authority’s DeLauri Sewer Pump Station in Charlestown, was purchased using $4.7 million in stimulus funds.

“This clearly demonstrates that the rights of foreign businesses in China are not currently protected, “ AMSC chief executive Daniel P. McGahn said in statement. “Given that it is clear that a crime has been committed, the Chinese now have an opportunity to demonstrate that they respect intellectual property and take trade secret theft seriously.”

Sinovel could not be immediately reached Thursday, but has previously denied wrongdoing. Sinovel has \counter-sued AMSC in China, seeking $200 million for breach of contract and other claims.

According to the indictment, filed in Wisconsin where AMSC develops its wind turbine control software, Sinovel sold turbines to customers in Charlestown, Fairhaven, and Scituate that contained the stolen software.

The US Department of Justice has made a concerted effort to crack down on intellectual property theft in recent years, creating a strategic plan and a taskforce in 2010 aimed at addressing in intellectual property crimes here and abroad.

Last year, for example, the government brought charges against a Chinese company controlled by the Chinese government for attempting to steal trade secrets for a valuable white pigment used in paper, plastics, and paint from E.I. du Pont de Nemours & Co., of Wilmington, Del.

In China, AMSC has filed four cases against Sinovel, all which are winding their way through the Chinese legal system and could take months to years to resolve. The company is also investigating other international markets where Sinovel sells its turbines, including Brazil.

AMSC’s situation has gained the attention of top level officials in Europe, China, and the US, including Vice President Joe Biden and Secretary of State John Kerry.

“We believe our topic is on the agendas of President Barack Obama, as well as Chinese President Xi Jin Ping,” McGahn said during a recent call with analysts.

AMSC has been embroiled in the case since one of its field crews in China came across the allegedly stolen technology. An investigation launched by the company led to the 2011 conviction of an AMSC engineer in Austria, who was sentenced to a year in jail after pleading guilty to transfering software source code to Sinovel to help the Chinese replicate AMSC’s technology.

Meanwhile, AMSC’s stock and revenues plunged. Layoffs that followed have cut the company’s global workforce to 362 employees from 842, according to company financial filings. On Thursday, the company’s stock traded at about $2.30 per share in New York, down from nearly $25 per share at the end of March 2011.

McGahn has said he remains confident that that the company will survive the legal battle with Sinovel and prospers. Revenues increased 14 percent in 2012, to $87.4 million from $76.5 million in fiscal 2012. Losses were cut in half to $66.1 million. Still, McGahn told analysts in mid-June that the company’s strategy is to be profitable by the end of fiscal 2014.

“We recognize the challenges that lay ahead,” McGahn said, but “we’re looking towards 2013 and 2014 with optimism.”