In 2011, a little known Massachusetts-based technology company, American Superconductor (AMSC) sued a startup company, Sinovel, in several provincial courts in China. Most people paid little heed to the development of the case, until several US politicians cited the case as a most egregious example of Chinese Corporate Espionage. As usual, the politicians’ citations of examples are rarely backed up with any factual analysis, especially for a case that’s yet unresolved in China. US politicians’ rather empty fanciful descriptions of the case have been amplified by repetitions of the accusations across Western media, with equally poor amount of factual analysis. Thus, we here provide our most detailed analysis from available facts.
In 2010, Sinovel suddenly stopped accepting AMSC’s controllers, citing low quality and bad performance of the controllers. AMSC through its investigations, believes that Sinovel had bribed an employee/manager of Windtec, an AMSC subsidiary in Austria. The bribe reportedly totaled around $20,000, plus an apartment and prostitute. The bribed employee allegedly resigned from Windtec, but his supervisor asked him to keep the company email access to help the company until a replacement was found. Sinovel allegedly hired the employee, who emailed stolen source codes to Sinovel employees, and then went to China and helped Sinovel modify AMSC’s code in the controllers. Sinovel then established its own subsidiary in China to make the controller hardware, and installed its own controller with the modified AMSC code.
AMSC’s bribed employee upon interrogation in Austria, promptly confessed to the entire plot, conveniently. An Austrian court sentenced the corporate spy, a Serbian National, to several years in prison.
AMSC then brought lawsuits in 4 separate jurisdictions in China, among them, 1 for breach of contract, 2 for copyright infringement, with damage totaling about $1.2 billion. Sinovel countersued for breach of contract with damages of $58 million.
Most pertinent to the US Politicians’ accuastions relates to the 2 lawsuits for copyright infringement, 1 in Hainan and 1 in Beijing. Sinovel moved to dismiss both cases on the ground that both cases of copyright infringement should be covered by the Contract arbitration clause, and thus should be consolidated with the Breach of Contract lawsuit pending in an Arbitration Commission.
A Hainan Higher Court dismissed AMSC’s copyright infringement case in Hainan, but a Beijing Intermediate Court ruled against Sinovel. AMSC appealed the Hainan ruling in the Chinese Supreme Court, and the ruling is pending. Western media hyped the pending Chinese Supreme Court ruling as monumental for IP rights in China. As we will see, it’s any thing but, and AMSC’s entire case may actually fall apart in the substance as well.
(1) The pending issue before the Chinese Supreme Court is not on the merit of the cases. The Issue is one of jurisdiction: Whether the civil courts are the proper jurisdiction for determining the copyright infringement claims, or the Arbitration Commission should hear the copyright infringement claims.
Regardless of how the Chinese Supreme Court rules on the pending issue, the outcome of the copyright infringement claims would not be determined until much later.
(2) On the merits of AMSC’s claims and allegations, there are many unclear factual aspects. Here are some most glaring ones, along with my analysis:
I. Copyright infringement NOT covered by Contract??
Sinovel was AMSC’s customer, and accounted for about 80% of AMSC’s revenue (according to AMSC). Sinovel bought and paid for at least some of AMSC’s shipment of controllers, which AMSC had programmed the control codes into the “firmware,” which is like the resident ROM type memory of the controller system, without the need for loading the code from any disk.
AMSC’s own public statements also indicated that AMSC loaded the controller firmware in Windtec with a 14 day expiration date or “trial period,” after which the controllers in Sinovel’s wind turbines would automatically shut down. 14 days? How can that work? And why? AMSC would have to reset the trial period for every wind turbine after every 14 days.
According to AMSC’s signed Quarterly 10Q statement filed with US Security Exchange Commission: http://quote.morningstar.com/stock-filing/Quarterly-Report/2011/9/30/t.aspx?t=XNAS:AMSC&ft=10-Q&d=f34e3a03802c28239a30ee0552f302be
The evidence presented during the court hearing showed that this former employee was contracted by Sinovel through an intermediary while employed by us and improperly obtained and transferred to Sinovel portions of our wind turbine control software source code developed for Sinovel’s 1.5MW wind turbines. Except for portions of this 1.5MW wind turbine software, we do not believe that the source code for any other turbines, such as the 3MW, 5MW and 6MW wind turbines that were designed by and co-developed with us have been transferred to Sinovel. Moreover, we believe the evidence shows this former employee illegally used source code to develop for Sinovel a software modification to circumvent the encryption and remove technical protection measures on the PM3000 power converters in 1.5MW wind turbines in the field. We believe that only the binary code, or upper layer, of the PM3000 software developed to circumvent the encryption and remove technical protection measures was transferred to Sinovel. We do not believe that any PM3000 source code was transferred to Sinovel. These actions potentially enable Sinovel to deploy, independent of us, wind turbine control software, including a low voltage ride through solution, on all of its 1.5MW wind turbines in the field. In addition, by having the wind turbine control source code, Sinovel could potentially modify the source code to allow the use of core electrical components, including power converters, from other manufacturers.
The answer is that AMSC planted a “Time Bomb” upper layer in their firmware code, a piece of code that would cause AMSC’s encrypted firmware code to become inoperable after 14 days. Some similar types of software copyright protection are called “trialware,” most common of which can be seen in the trial versions of Microsoft’s Window Vista Operating System.
However, the difference between a “trialware” and a “Time Bomb” is that a buyer of “trialware” is aware and agreed to the “trialware,” which is usually free, while in contrast, a buyer of a “Time Bomb” planted software is NOT aware and did not agree to the “Time Bomb.” A “trialware” is usually legal, due to evidence of buyer’s awareness in a software license (a contract).
A “Time bomb” is generally not legal, not enforceable, and potentially considered criminal computer trespass, because the buyer did not agree to it. (See for example, US, Virginia Criminal Code, § 18.2-152.4. Computer trespass; penalty, “A. It shall be unlawful for any person, with malicious intent, to: … 2. Cause a computer to malfunction, regardless of how long the malfunction persists”.)
A particularly relevant US case is Clayton X-Ray Co. v. Professional Systems Corp., 812 SW2d 565 (Mo. Ct. App. 1991). http://www.leagle.com/xmlResult.aspx?xmldoc=19911377812SW2d565_11324.xml&docbase=CSLWAR2-1986-2006. In Clayton, software vendor PSC planted a time bomb in Clayton X-ray’s computer, which caused the computers to lock up after a period of contract dispute between the parties. (Also in this case, Clayton X-ray managed to hire a former PSC employee to disable the time bomb to allow Clayton X-ray to resume operations). The state appeals court in the Clayton case upheld a punitive damage against software vendor PSC.
Here, AMSC’s own assertion may be harming its own case, because AMSC asserted that the copyright of its software was not covered by its contract with Sinovel. I.e. the contract did not contain any provisions relating to software licensing, and Sinovel was not aware of the Time Bomb at the time of the contract.
Without a software license for AMSC’s code, the code was effectively part of Sinovel’s hardware purchase, especially because the code came along with the controllers, and without the code, the controller could not function properly, or usable by typical commercial contract standards. Effectively, AMSC’s contract sale of the controllers gave Sinovel unlimited license to use the software as it chooses.
Because AMSC shipped the software with the controller hardware as part of a contract, Sinovel was a legitimate user of the code. As such, under Chinese copyright law, Sinovel was allowed to modify the code WITHOUT the permission of AMSC:
Article 41: Lawfully authorized users of computer programmes may engage in the following activities:
(1) installing the said computer on computers and other devices having information processing capacity on the basis of requirements for use;
(2) producing back-up reproductions to prevent damage to the computer programme. This sort of back-up reproductions may not be provided to other persons from use in any way, and when that person loses lawful authorization, he is responsible for the destruction of back-up reproductions;
(3) conducting necessary alterations in order to use the said computer programme in a real applied computing environment or improve its functions or functioning; without permission of the copyright holder of the said programme, the revised programme may not be provided to third parties in any way.
Article 42: In order to study and research the design thinking and principles that computer programmes contain, those using computer programmes through installation, display, transmission, storage or other means, may go without the permission of the copyright holder of the computer programme, and do not pay remuneration to them.
Article 43: When lawfully authorized users of computer programmes cannot obtain necessary compatibility information through regular channels, they may reproduce and translate the content of the part related to compatibility information in the said computer programme, without permission of the copyright holder of the said computer programme.
For using the information obtained according to the provisions of the above Paragraph, the use objective of computer programme compatibility may not be exceeded, it may not be used to develop, produce or sell virtually similar computer programmes, and may not be used for any activity infringing copyright.
As long as Sinovel does not transfer its copy of the AMSC’s code, Sinovel can make copies, use, modify the code as it pleases.
Note also, without an express software licensing agreement to limit, Sinovel can have as many copies as it chooses and use the code with whatever hardware it can buy or build.
II. Why was there no software licensing?
AMSC’s own VP and spokesman confirmed my suspicion regarding the lack of IP coverage on AMSC’s contract: http://www.greentechmedia.com/articles/read/the-wheels-of-chinese-justice-turning-slowly-toward-u.s.-wind
“These are copyright infringement matters,” (AMSC VP of Communication Jason) Fredette said. “Our contracts don’t contemplate copyright theft. Or IP theft.” These matters, he added “belong in the court system rather than in arbitration. For the time being, Hainan does not agree with us but Beijing does.”
AMSC’s appeal to the Supreme People’s Court will be based on that premise.
“We have trade secret matters and copyright infringement matters that we’re taking to the civil court because we don’t think there’s any recourse we could have in arbitration,” Fredette explained. The Beijing court’s decision, he added, “said this dispute does not arise from or in connection with the execution of our contracts with Sinovel.”
A Chinese source familiar with contractual dealings there, who because he continues to do business in Shanghai with Chinese wind manufacturers did not want to be named, suggested to GTM that ultimately AMSC’s mistake was in not having a contract that protected proprietary information.
Fredette did not find that plausible. “When you draft and sign contracts, you do not contemplate that the party you’re dealing with will eventually steal your intellectual property,” he said. “You can’t really write that into a contract because I think the other party would take umbrage (offense) with it.”
Please NOTE the last quote from AMSC’s spokesman. Apparently, AMSC was so worried about how the other party might be offended, that it didn’t bother to specifically protect its supposedly most valuable IP assets in a legal contract!!
Well, by that logic, AMSC should have torn up the contract completely, because why negotiate or bargain money? I would think the other side would be more offended by money haggling!! By the same logic, by doing business, you don’t contemplate that the party you’re dealing with will eventually cheat out of the deal either, but that’s precisely WHY parties have written contracts!!!
(I do not believe that AMSC management would be that bad at negotiating that they would accidentally forget to put in some kind of contract clause limiting software license, which would be a TERRIBLE MONUMENTAL ERROR in ANY country, but I’m being apparently optimistic, because in this case, AMSC’s contract literally gave away the software. HOWEVER– see next).
It’s odd to say the least, that AMSC would somehow negotiate a contract with Sinovel, its biggest customer, to sell its unique IP, without limiting the software licensing. So what could be the explanation for this? I would not speculate to say for certainty, so here are some POSSIBLE explanations based upon available facts and general business practices:
(a) AMSC didn’t want to sell software, because the hardware would have a bigger revenue.
Afterall, even with billions poured by the Chinese government into the Sinovel wind farms, there are ONLY so many turbines. How many copies of the software can AMSC possibly sell? Controllers on the other hand, integrated with the software, AMSC could potentially lock in as a parts supplier for decades (considering replacements, etc.)