In a story that Hollywood would love to script, the U.S. Government charged Sinovel and its executives with soliciting the then-head of the Automation Engineering Department of AMSC’s Austrian subsidiary, AMSC Windtec GmbH, to steal AMSC’s source code in order that Sinovel might bypass a commercial relationship with AMSC and utilize AMSC’s trade secrets without paying for ongoing software licenses.
On June 27, 2013, a grand jury in the United States District Court for the Western District of Wisconsin charged Chinese-wind-turbine-manufacturer Sinovel Wind Group Co., Ltd. (“Sinovel”), two of its high-ranking executives, Su Liying and Zhao Haichun, and a former high-level AMSC engineer, Dejan Karabasevic, of conspiring to steal and actually stealing AMSC’s trade secrets, engaging in criminal copyright infringement, and engaging in wire fraud. The following facts are taken from the United States’ complaint and indictment.
AMSC, formerly known as American Superconductor, Inc., is a Delaware corporation, headquartered in Massachusetts. AMSC’s core business is the development, support, and production of equipment and software for wind turbines and electrical grids. Amongst its products is software utilized to regulate the flow of electricity from wind turbines to electrical grids. One issue over which wind turbine manufacturers have had to overcome in this emerging technology is how to maintain operation when a temporary sag or dip in the flow of electricity occurs over the electrical grid. Attempting to solve that issue, AMSC developed its Low Voltage Ride Through (LVRT) software, which it licensed to, among other companies, Sinoval. Sinovel sold and serviced wind turbines worldwide, including in China and the United States.
Until March 2011, Sinovel purchased software and equipment from AMSC. At that point, Sinovel owed AMSC over 100 million dollars and had contracted with AMSC to purchase another 700 million dollars’ worth of AMSC software, products, and services in the future. See, e.g., Daniel Cusick, Chinese wind power giant faces U.S. indictment on economic espionage charges, Environment & Energy Publishing (August 22, 2013, 9:23 a.m.)
In March 2011, without prior warning, Sinovel suddenly ceased accepting products from AMSC. Around the same time, specifically on March 10, 2011, Karabasevic submitted his resignation to AMSC, which was accepted on March 11, 2011. Karabasavic’s final day with AMSC was June 30, 2011.
In June 2011, while servicing wind turbines in China, AMSC engineers discovered that Sinovel was utilizing a version of AMSC’s LVRT software in a wind turbine in China, software which AMSC had not sold or licensed to Sinovel. Notably, fearing international espionage and unauthorized use of its software, AMSC previously developed an encryption code to prevent unauthorized use and a separate software code allowing only a two-week trial period of the software before the LVRT software stopped functioning. Inspecting the code more closely, AMSC determined that the code had been modified in two particular ways: (1) bypassing the encryption code by deactivating it; and (2) disabling the two-week test period software-use limitation.
Within the following weeks, AMSC investigated the activities of Karabasevic—in some instances utilizing a private investigative firm—discovering a host of email and Skype communications between Karabasevic and various Sinovel employees. Those communications outlined a plan between Sinovel and Karabasevic whereby Karabasevic would download, provide, and, when necessary, modify and/or repair the AMSC LVRT software to work within Sinovel’s turbines. For his work, Sinovel and Karabasevic agreed to a six-year, $1.7 million dollar contract, beginning in May 2011, which also allegedly included Sinovel providing Karabasevic with a Beijing apartment and sending funds to Karabasevic’s girlfriend in August 2011, a month before Karabasevic was convicted by an Austrian court of industrial espionage in September 2011. See, e.g., Carl Sears and Michael Isikoff, Chinese firm paid insider ‘to kill my company,’ American CEO says, NBC News (September 9, 2013, 3:31 p.m.) Karabasevic was confronted by AMSC on June 30, 2011, and provided a signed statement on July 28, 2011. In his statement, Karabasevic admitted to the above. Karabasevic also gave written permission to search the Beijing apartment secured for him by Sinovel. During that search, two notebook computers, an external hard drive, and other documents were obtained. Subsequent review of those devices and materials corroborated that Karabasevic stored, possessed, and manipulated AMSC’s LVRT software.
Based on the FBI’s investigation, the FBI subsequently obtained a warrant to search various Sinovel wind turbines that Lumus Construction was scheduled to install in Massachusetts. In March 2012, May 2012, and December 2012, FBI agents searched such turbines and determined that AMSC’s pirated software was found within these Sinovel-manufactured turbines.
Since the United States obtained the indictments in late June—and in what bears particular attention for companies doing international business—Sinovel is attacking the efficacy of the United States’ summons, arguing that the United States’ service attempts are faulty insomuch as the United States improperly (and ineffectively) served Sinovel’s U.S.-based subsidiary, Sinovel Wind Group (USA) Co., Ltd., but not its Chinese parent, Sinovel Wind Group Co., Ltd. Sinovel argues that it is not subject to the United States’ summons power as a Chinese corporation and that service of Sinovel USA (dissolved in early July 2013) is not proper under Federal Rule of Civil Procedure 4.
On September 6, 2013, the United States filed its response in opposition to the motion to quash, arguing that Sinovel USA is the alter ego of the parent corporation. At the heart of this argument, the United States is claiming that Sinovel’s recent closure of its US subsidiary was made to avoid service of process and a direct result of the United States’ case against Sinovel.
This case—beyond providing an interesting alleged story of corporate espionage—should also present a bellwether, of sorts, for the United States’ prosecution of foreign corporations and may cause U.S. corporations to further evaluate their international business ventures with certain companies. As noted in Sinovel’s moving papers, the United States has not had much, if any, success in properly serving foreign corporations in matters in which the United States seeks to bring criminal charges (Sinovel Mem. of Law in Support of Mot. to Quash Service at p. 4 (Dkt. 51).) If the United States cannot hale foreign corporations accused of international espionage into its courts, then—no matter the investigative lengths to which the United States goes—United States corporations may continue to lack adequate protections against foreign corporations accused of stealing their trade secrets. This is particularly the case whereas here the indicted individuals are all foreign nationals whom the United States has little, to no chance, to ever extradite and is further exacerbated by AMSC’s repeated losses against Sinovel for its business losses before Chinese Courts.
While failure to prosecute Sinovel is a worse-case scenario for the United States, this case continues to highlight why companies must monitor the access its employees have to secure databases and to a company’s trade secret and confidential information. Companies should consider using additional preventive means to prohibit employees from stealing trade secrets, such as configuring the operating system to restrict access to external devices, thus, restricting the ability to download information to an external device; blocking a user from uploading information to a web-based site; and/or utilizing software that blocks employees from sending emails to certain domain names. In situations like this, companies may also wish to consider placing blocks on the ability of its employees to email certain domain names that are known to be used for personal email accounts. In an era in which data is becoming increasingly portable, companies much increase their vigilance in monitoring use and exporting of its data and trade secrets.