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Sinovel to pay American Superconductor $57.5M settlement for trade secret theft

After agreeing to pay a Massachusetts-based clean technology company $57.5 million to settle their remaining legal disputes, Sinovel Wind Group Co. Ltd. got slapped with a $1.5 million fine for stealing trade secrets from American Superconductor Corp., or AMSC.

On July 6, the U.S. District Court for the Western District of Wisconsin imposed the maximum statutory fine on the Chinese wind turbine firm. In addition, Sinovel will also pay $850,000 to additional victims. The sentencing comes after AMSC announced July 3 that Sinovel agreed to pay $32.5 million by July 5 and the remaining $25 million within 10 months of Sinovel's sentencing.

As part of the settlement agreement, AMSC and its Austrian subsidiary have granted Sinovel a nonexclusive license for certain intellectual property to be used in Sinovel's doubly fed wind turbines. The companies are also ending legal proceedings in China.

On Jan. 24, a federal jury found Sinovel guilty of trade secrets theft, conspiracy and wire fraud. The company was convicted of recruiting an AMSC subsidiary employee in 2011 to steal trade secrets instead of honoring its contract to buy $800 million of AMSC products and services. The American firm said the trade secret theft led to the loss of $1 billion in market capitalization and the layoff of 700 employees.

AMSC President and CEO Dan McGahn said in a statement that his company's cooperation with Sinovel has been "heralded as the example of Sino-U.S. cooperation in the new energy area" and the settlement allows both parties to resolve a nearly decadelong legal battle between AMSC and its formerly largest customer. "This closes a challenging chapter for AMSC," he said.

For the business relationship between the U.S. and China, however, the fight is not over. The AMSC-Sinovel case underscores President Donald Trump's ongoing trade tensions with China, such as the duties on solar panel imports. Trade secret theft and protecting intellectual property have been a big part of the U.S. and China's crossfire, said James Pooley, a California-based intellectual property lawyer and former president of American Intellectual Property Law Association.

"What this outcome will demonstrate for U.S. companies is that in the event that you do discover actual misappropriations by a Chinese company, it is possible to get enforcement of your sights, and it is possible after the end of a long struggle to recover damages," Pooley said in an interview. "That should be a sobering message for everyone that there are actually rules that apply to global operations."

Move along

The $57.5 million settlement pales in comparison to the losses AMSC has incurred, said Michael Hobbs, a partner at Atlanta-based Troutman Sanders LLP who specializes in intellectual property law for the energy industry. However, the payment "is nothing to sneeze at," and the payment and the license agreement reflect that the value of intellectual property in the renewable energy industry is going to keep increasing.

"The license is very interesting, because the litigation was very hostile and it revealed some very bad facts about the behavior that Sinovel engaged in — which makes me wonder why you would want an ongoing relationship with that company?" he said during an interview with S&P Global Market Intelligence. But, a license agreement means AMSC can file a breach of contract claim if the Chinese wind turbine maker violates the terms, he added.

The money will likely "significantly improve" the company's cash balance by eliminating capital constraints as AMSC works on becoming cash-flow even, Oppenheimer & Co. analysts said in July 5 note. For the 12-month period ending on March 31, the company's net income was negative $32.7 million. Considering Sinovel has less than $100 million in cash, the settlement is still a positive development for AMSC, said Carter Driscoll, an equity analyst with B Riley FBR. "Getting $32.5 million today almost doubles their cash position," he said.

The timing of the settlement is likely not coincidental, Pooley said. Sinovel may had been hoping that the settlement and the payments to AMSC would influence the court in its sentencing. Moreover, some of the settlement terms underscore the parties' willingness to come to common ground, he added. Allowing Sinovel to continue to use some AMSC intellectual property in its turbines benefits both parties because Sinovel does not have to take out its installed products and start from scratch, while AMSC gets a healthy cash payment and does not experience additional harm from what the Chinese firm has already done.

"At some point after a long fight like this, companies involved in these kind of battles take a hard look at where they are and where they might be able to get and do a risk assessment," he said.