A Test Case for Intellectual Property in China

Will Chinese courts finally protect foreign IP?

3 min read

In the next few months, a series of lawsuits will play out in the Chinese courts that could define the risks foreign companies take when they try to make money in China’s booming markets. The U.S. green energy company AMSC is suing its former customer Sinovel Wind Group Co., China’s biggest wind turbine manufacturer, for breach of contract, copyright infringement, and theft of trade secrets. In total, AMSC, based in Devens, Mass., is asking for about US $1.2 billion in damages, making this the largest intellectual property case to date in China.

AMSC appears to have strong evidence, including a full confession from an AMSC employee who said he sold trade secrets to Sinovel. Yet China has a reputation as a place where intellectual property laws are routinely flouted. So the legal outcome is uncertain—and is of great interest to foreign companies. 

“There are a lot of eyes on this case,” says Jason Fredette, AMSC’s vice president of communications and marketing. “Given all the evidence that we do have, and given that this would be an open-and-shut case in any Western court, it is important to see the Chinese courts do the right thing.”

Sinovel did not respond to requests for comments, but the company previously released a statement calling the charges “completely false.” The company has also filed a counterclaim regarding the contractual dispute.

As of press time, the first legal skirmish—a $200 000 copyright infringement case regarding AMSC’s software—had been won by Sinovel, which got a full dismissal of the case from a provincial court. But the much larger cases regarding trade secrets and contracts may fare better in the higher courts of Beijing.

AMSC (formerly known as American Superconductor Corp.) sells wind turbine designs and turbine electrical control systems through its Windtec Solutions division. AMSC and Sinovel once had a very close business relationship: Sales to Sinovel previously accounted for about 70 percent of AMSC’s revenues. But in March 2011, Sinovel refused a shipment of wind turbine components. “We first thought that this was an inventory issue, and we were understanding,” says Fredette. “Then in June we discovered this IP theft, and that changed things quite a bit.” 

The intellectual property in question is a new software package from AMSC that enables “low-voltage ride through,” which allows wind turbines to continue operating during grid outages. AMSC gave Sinovel the software to test, but it had an expiration date that should have shut it down after a few weeks. 

When an AMSC employee in China found a Sinovel turbine operating with “expired” software, AMSC quickly fingered an employee in Austria, Dejan Karabasevic. “We had a very limited number of employees who had access to the LVRT software and an even smaller number who had traveled in China,” says Fredette. Karabasevic pleaded guilty in an Austrian court and was sentenced to one year in prison and two of probation for stealing trade secrets. 

AMSC says it has further evidence, including signed employment contracts between Karabasevic and senior-level Sinovel employees that amount to more than $1.5 million.

The Chinese courts that will rule on the AMSC cases are aware of the world’s scrutiny, says Mark Wu, an assistant professor at Harvard Law School and an expert on intellectual property in China. He says that the Chinese government is trying to shift its economy away from manufacturing and toward research and innovation. “Stronger IP protections are necessary to achieve that policy goal,” says Wu. He also notes that more patent and copyright lawsuits are being brought in Chinese courts by Chinese litigants. “So it seems like progress, because there are more Chinese stakeholders,” he says.

But, Wu adds, foreign companies are still frustrated with IP theft and dissatisfied with China’s enforcement mechanisms. “Often foreign companies get some form of remedy from the courts, but they say that it’s insufficient compared to the value of what was stolen,” Wu says. “The question really is whether IP enforcement in China is effective from a business standpoint.” 

AMSC suffered a serious blow when it lost Sinovel’s business; since a year ago its stock price has plummeted about 80 percent, and the company has laid off nearly 40 percent of its employees. But as CEO Daniel McGahn said during an investor conference call in September, the company can’t afford to withdraw from China. “It is an economic reality that we must do business in China, and I believe we can do it securely and profitably.” 

If AMSC wins its lawsuits in the Chinese courts, a lot of other companies will suddenly feel more secure, too. 

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