A federal grand jury, acting in a case that could have implications for US-China relations, indicted a Chinese wind turbine maker Thursday on charges that it stole key technology from a Massachusetts company.
The criminal charges escalate a two-year battle playing out in Chinese courts between American Superconductor Corp., 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 fuel to one of the biggest sources of tension between the United States and China: the theft of intellectual property from US companies.
"The allegations in this indictment describe a well-planned attack on an American business by international defendants – nothing short of attempted corporate homicide," said John W. Vaudreuil, US attorney for the Western District of Wisconsin, who sought the indictment.
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 Sinovel's sale of four turbines to Massachusetts customers — each turbine 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.
Following the indictment Thursday, AMSC called on the Obama administration and Congress to "re-evaluate the US trade relationship with China," given that companies in China are "brazenly stealing trade secrets."
"This clearly demonstrates that the rights of foreign businesses in China are not currently protected," AMSC chief executive Daniel P. McGahn said in a statement.
Sinovel could not be reached for comment Thursday, but the company has previously denied wrongdoing. Sinovel has countersued AMSC in China, seeking $200 million for breach of contract and other claims. Sinovel is being investigated by the China Securities Regulatory Commission over possible violations of security laws and regulations, according to news reports out of China.
The federal indictment, filed in Wisconsin, where AMSC develops its wind turbine control software, charges Sinovel with conspiracy to commit trade secret theft, criminal copyright infringement, and wire fraud. By stealing AMSC's technology, the indictment charged, Sinovel cheated the Devens company of more than $800 million.
The indictment alleges that several months after AMSC sued Sinovel, the Chinese company sold turbines to customers in Charlestown, Fairhaven, and Scituate that contained the stolen software. One of the turbines, near the wastewater treatment plant on the Driftway in Scituate, was partially financed by a state bond, according to public records.
If convicted, Sinovel faces a maximum penalty on each count of five years of probation and a fine – on each count — of up to double the more than $800 million the indictment alleges AMSC lost.
"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.
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 task force in 2010 aimed at addressing intellectual property crimes here and abroad.
Last year, the government brought charges against a 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 from months to years to resolve.
AMSC's situation has gained the attention of top-level officials in Europe, China, and the United States, 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 Jinping," McGahn, the AMSC chief executive, said during a recent call with analysts.
AMSC has been embroiled in the case since 2011, when 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 transferring software source code to Sinovel to help the Chinese replicate AMSC's technology.
Thursday's indictment offered additional details about how that convicted AMSC engineer, Dejan Karabasevic, allegedly worked with two Sinovel employees to copy the Devens company's technology. According to the court filing, Sinovel offered Karabasevic a six-year, $1.7 million contract and gave him an apartment in Beijing, as well as equipment, including a laptop, to transfer code and modify AMSC's technology.
In several instant messaging chats, according to the indictment, Karabasevic allegedly told the Sinovel employees he had transferred "full code" to the company, and if they succeeded in adapting the technology Sinovel could "separate from AMSC." When Sinovel did break, AMSC's stock and revenues plunged. Layoffs have cut the company's workforce to 362 employees from 842, according to company financial filings.
McGahn has said he remains confident the company will survive the legal battle with Sinovel and prosper.
Revenue increased 14 percent in fiscal 2012, to $87.4 million from $76.5 million in fiscal 2011. Losses were cut in half to $66.1 million. McGahn told analysts in mid-June that the company expects to be profitable by the end of its fiscal 2014.