Data theft case may test US, China ties

By Erin Ailworth

Sept 19,2011

In June, an American Superconductor Corp. field crew in China doing routine inspections of wind turbines for the company's biggest customer noticed something was not right. The blades were spinning on a turbine thought to be out of operation.

Once they opened the machine, the team from the Devens-based company made a startling find. Someone had replicated American Superconductor's electrical control system software almost perfectly. Only an identification number was off.

This discovery culminated last week with American Superconductor accusing its largest customer, wind turbine maker Sinovel Wind Group Co. of Beijing, of stealing its technology. During the past three months, American Superconductor has turned to authorities in Austria, China, and the United States to help it press criminal, civil, and commercial charges against Sinovel, which denies any wrongdoing.

The outcome has implications not only for American Superconductor but for the alternative energy industry and the Massachusetts economy. Earlier this year, American Superconductor cut nearly one-third of its workforce.

"Massachusetts jobs are at stake and so is the future of Sino-American collaboration in this [alternative energy] sector," said Senator John F. Kerry, a Massachusetts Democrat who is Senate Foreign Relations Committee chairman. "American businesses won't make investments there if this can happen to them."

The situation highlights long-running tensions between the United States and China over protecting intellectual property, from hardware to software to movies on DVDs. For the past decade, China has been the top source of intellectual property rights violations, a report by US customs, immigration, and border protection officials found.

Major US corporations, such as Microsoft Corp. , Motorola Inc. , and Cisco Systems Inc. , have pursued cases against Chinese companies over intellectual property, winning court judgments or settlements to regain control of their technologies, according to news reports.

Thomas F. Holt Jr., who teaches international intellectual property at Tufts University's Fletcher School of Law and Diplomacy, said American Superconductor's case underscores issues critical for state and federal governments, such as ensuring that companies making advances in the promising green technology sector are protected. China has emerged as a top competitor in alternative energy, an innovation sector the United States has hoped to dominate and Massachusetts has aspired to lead.

"With persistent unemployment in the United States, any action by China that overtly deprives Americans of jobs is a hot political issue," Holt said. "And if you combine that with the fact that it involves green technology, this story becomes even more compelling."

But Kelly Sims Gallagher, a professor of energy and environmental policy at Tufts, cautioned against viewing American Superconductor's case as "a malicious underlying effort by the Chinese government to undermine the American clean-energy industry."

"This is the big bad world of industry, and competition is fierce," she said.

Founded in 1987, American Superconductor makes control systems, power cable systems, and other advanced electronics for wind turbines and utilities. It started selling to Sinovel in 2006, and the companies helped each other prosper. Sinovel, now China's leading wind turbine maker, became American Superconductor's biggest customer, accounting for nearly 80 percent of the Devens company's revenue at the end of last year.

The relationship soured this spring when Sinovel began refusing to accept and pay for American Superconductor's shipments. Rumors swirled that Sinovel was about to switch suppliers.

As a result, American Superconductor estimated in a regulatory filing, its revenue plunged 90 percent in the first quarter, to less than $10 million from nearly $100 million a year earlier. Its stock dove 80 percent, to $5.33 Friday from nearly $25 in April. Roughly 150 workers lost jobs.

When the field crew made its discovery in China in June, American Superconductor officials began to suspect that the loss of Sinovel's business was related to the theft of its technology, according to sources familiar with the situation, who requested anonymity because an investigation is ongoing. Few of American Superconductor's employees have access to codes that would allow someone to bypass encryptions used to protect software, and only one had that access along with significant contact with Sinovel, the sources said. The company's investigation quickly focused on an engineer who worked at AMSC Windtec, its subsidiary in Klagenfurt, Austria.

Company officials and Austrian authorities questioned the man, who has not been named, in the office before interrogating him further at a police station, where he was arrested in July.

Helmut Jamnig, spokesman for the federal prosecutor's office in Klagenfurt, said the engineer, a 38-year-old Serbian man who had worked for American Superconductor for several years, told authorities he was paid nearly $20,700 to pass internal documents to a Chinese company from January through June. He gathered much of the data by plugging external hard drives into his work laptop in April and downloading data from a company network.

The employee, Jamnig said, is scheduled to go on trial Friday on charges of "fraudulent misuse of data processing" and misdemeanor spotting or reconnoitering "of a trade secret in favor of a foreign entity."

Sinovel explicitly denied it stole American Superconductor's technology, insisting American Superconductor's products did not comply with Chinese power grid requirements and were prone to failure.

"It couldn't adapt to global needs, especially the rapid growth of China wind power technology," Sinovel said, according to a translation of a statement issued in Mandarin Friday. Sinovel said it had to spend money and rely on its own innovations to fix problems with American Superconductor's products.

Holt, the intellectual property rights specialist from Tufts, said he was skeptical of Sinovel's defense. A partner at the K&L Gates law firm, which has offices in Asia, Holt has written extensively about US-Chinese tensions as China has emerged as an economic power.

"Chinese companies, once they acquire the needed technology, will often abandon their Western partners on the pretext the technology or product failed to meet Chinese governmental regulations," Holt said. "This is yet another example of a Chinese industrial policy aimed at procuring, by virtually any means, technology in order to provide Chinese domestic industries with a competitive advantage."

American Superconductor has filed civil and criminal suits in China against Sinovel and several other entities and registered a complaint with the Beijing Arbitration Commission, an organization meant to provide an impartial forum for corporate disputes. The company said it will seek monetary damages from Sinovel and an order that the Chinese company pay for its technology or stop using it.

American Superconductor said it does not know how long it will take to resolve the case, or what it might cost. In addition to Kerry, the company has received help from the US Embassy in China and Governor Deval Patrick's administration, said Daniel P. McGahn, American Superconductor's chief executive.

"This is obviously a big event, when we look at trade, when we look at energy cooperation," McGahn said. "It's not just about American Superconductor, and that's why I think you're seeing the political interest that you do."

William P. Alford, director of East Asian legal studies at Harvard Law School, said American Superconductor may have a strong case, but enforcement of China's intellectual property laws can be uneven. China has not put a lot of emphasis on individual ownership of ideas, he said.

In addition, though China has extensive intellectual property laws, enforcing them can be hard, especially if local governments are receiving illicit payments or are legitimately trying to boost local industries and employment.

"We're such a law-oriented culture here that we think when somebody has broken the law and taken advantage of you, you go to court and get justice," Alford said. "And that's not the way it always works in China."