U.S. federal criminal charges against wind turbine manufacturer

China’s largest wind energy manufacturer, Sinovel Wind Group Co. Ltd. (“Sinovel“) has unwittingly become the focus of the growing tension between the U.S. and China over issues of intellectual property rights, theft of trade secrets and cyber-security. Since 2008, the FBI estimates that economic espionage against U.S. corporations has doubled.

In a federal indictment filed last month, a U.S. Grand Jury charged Sinovel and three individuals associated with Sinovel, with trade secret theft, wire fraud, copyright infringement and conspiracy to defraud the United States over the alleged theft of proprietary software developed by AMSC to regulate the flow of electricity from wind turbines to electrical grids. Sinovel is a manufacturer and exporter of wind turbines headquartered in China.

According to the indictment, for several years AMSC supplied software to Sinovel that was used in its wind turbines around the world. Sometime in 2011, Sinovel allegedly recruited a Serbian software engineer from AMSC, Dejan Karabasevic, to obtain and reproduce his employer’s software so that Sinovel could use it in its wind turbines without having to continue to contract with AMSC for the software. At that time, it owed AMSC $100 million and had contracts valued at $800 million in force for AMSC software.

Karabasevic was allegedly recruited by Sinovel with promises of a $1.7 million contract and “females” in China. According to emails obtained by the FBI, Karabasevic’s corresponded with Sinovel officials in respect of the alleged trade secret theft and transferred modified versions of AMSC’s software to them. The modified software was then apparently installed in wind turbines located in the U.S.

AMSC become aware of the suspected cyber-security breach and theft of its software sometime in 2011 and hired private investigators, who eventually identified Karabasevic as the person whom they suspected stole the software. As a result of that investigation, Karabasevic was arrested in Austria in connection with the software theft and later convicted.

In the Fall of 2011, AMSC filed several lawsuits and arbitral actions against Sinovel in China claiming damages of over $1 billion in connection with the case, but in the subsequent two years the litigations and arbitrations have not progressed, hence the federal criminal charges in the U.S. against Sinovel.

U.S. Attorney John Vaudreuil called the Sinovel case one of attempted corporate homicide. AMSC has asked the U.S. government to take political action to protect and enforce intellectual property rights of U.S. corporations overseas that are stolen over the Internet.

The litigation and arbitration cases in China are extremely well documented according to AMSC’s general counsel. The conviction of Karabasevic no doubt helps AMSC’s position. Despite this, Sinovel may ultimately be unable to pay a $1 billion judgement if AMSC succeeds in its actions against it because  it has suffered a series of setbacks. It recently informed the Singapore Stock Exchange that it was closing its subsidiary operations in Canada, Italy, Belgium and the U.S. It’s stock has dropped 82% since its IPO in 2011 and last week it disclosed that it was restating its 2011 financials to reduce earnings by 22% as a result of an accounting error. It is also the subject of an investigation by the China Securities Regulatory Commission for suspected securities law misconduct, including inflation of earnings. China’s Global Times has also reported that approximately 50 shareholders of Sinovel in China are commencing a lawsuit against the corporation for alleged material misrepresentation in respect of its IPO and intend to claim hundreds of millions of dollars in compensation arising from the loss in share value. To top it all off, in May, Sinovel’s chairman, Wei Wenyuan, resigned from Sinovel after just two months as chairman and eight months as acting president.

With respect to the indictment in the U.S., the charge of trade secret theft under the Economic Espionage Act carries a sentence of up to ten years on conviction and a fine of up to $250,000 for individuals and $5 million for corporations. Conspirators who conspire to steal a trade secret also face the same penalties as those who commit the substantive offence.

There will undoubtedly be issues of jurisdiction that arise as a preliminary matter in the U.S. litigation. On that issue, the U.S. Supreme Court has held  on a number of occasions that unless a contrary intent appears, U.S. federal legislation applies only within the territorial jurisdiction of the U.S. with some exceptions, such as in the case of theft of trade secrets. Natural and legal persons may be prosecuted as long as the offender is a U.S. national or an act in furtherance of the offence was committed within the U.S. In the Sinovel case, the alleged theft apparently occurred from servers located in the U.S. and the alleged stolen software was located in wind turbines in the U.S., hence the U.S. connection.

Karabasevic and the two Sinovel employees indicted, Su Liying and Zhao Haichun, are in countries known to be extradition unfriendly, namely Serbia and China, respectively.