Revised post available here.

They say politics stops at the water’s edge. Increasingly, so does the power of the United States to thwart trade secret theft.

As the nation struggles to bolster its defenses against cyberattacks, recent cases have highlighted legal loopholes in prosecuting foreign-based companies and individuals for the theft of trade secrets. Defendants have grown adept at exploiting American procedural rules governing such things as service of process to stall prosecutions indefinitely.

Late last month, a federal grand jury in Wisconsin returned an indictment charging Sinovel Wind Group Co. and two of its executives with stealing trade secrets from American Superconductor Corp. (AMSC). Sinovel is China’s third-biggest maker of wind turbines, and until March 2011, AMSC supplied Sinovel with turbine-control software.

According to the indictment, Sinovel owed AMSC more than $100 million for delivered software, products, and services, and had contracted to buy another $700 million worth. But instead of paying its debts and making good on its orders, Sinovel and two of its executives plotted with a former AMSC employee to steal AMSC’s turbine-control source code and use it in Sinovel’s turbines. The former AMSC employee, Dejan Karabasevic, has pled guilty for his role in the alleged wrongdoing.

But on June 27, 2013, the same day of the indictment, Sinovel’s attorneys filed a letter with the court stating that they would make only a “special appearance” on Sinovel’s behalf, because Sinovel had “questions surrounding the validity or effectiveness” of the U.S. government’s service of process on Sinovel. The court ordered the government to file a “statement regarding service of summons,” which it did on July 8, 2013, and the court ordered Sinovel to file any motion to quash the summons by August 16, 2013.

This fight shows the difficulties the United States has been having prosecuting foreign corporations or individuals for trade secret theft. Before the United States can prosecute someone, it has to follow the legal requirements to serve them with a copy of the summons.

The problem is that serving a foreign individual or company isn’t easy. Even if the defendant knows about the case, that isn’t enough for them to be officially “served.” For example, in United States v. Kolon Industries, Inc., a Virginia case that also involved the theft of trade secrets by a foreign corporation, the government attempted to complete service of process on a Korea corporation in eight different ways:

1. Emailing a copy of the indictment to an attorney known to have represented Kolon in past civil matters;
2. Mailing copies of the summons by certified mail to Kolon’s last known U.S. address;
3. Emailing a copy of the summons to an email address that it found on Kolon’s public website;
4. Serving the summons on the president of a Kolon subsidiary, Kolon USA, Inc.;
5. Serving the summons on the treasurer for Kolon USA, Inc., who had been, in the past, the registered agent for Kolon in New Jersey;
6. Mailing certified copies of the summons to the subsidiary Kolon USA, Inc.’s address in New Jersey;
7. Transmitting (belatedly) a copy of the summons to the government of the Republic of Korea for service pursuant to the Mutual Legal Assistance Treaty; and
8. Sending a copy of the summons to the New Jersey Secretary of State.

The Virginia court found that none of these constituted service of process. The court ordered the government to try again, and told it what type of service of process would be acceptable. On May 30, 2013, the government filed a notice of service of process, saying it had properly served Kolon. Kolon didn’t agree, and filed a second motion to quash on June 5, 2013. The matter is scheduled for a hearing on July 18, 2013.

In a similar case in California, Chinese corporate defendants have managed to delay a U.S. government trade secret prosecution for well over a year — and they may kill it altogether — simply by challenging jurisdiction. In that case, the court granted the corporate defendants’ motion to quash service of the indictment on July 23, 2012. The government tried to serve them again, but almost a year later, on April 8, 2013, the court granted a second motion to quash saying it still hadn’t followed proper procedure. Since then, there have been status hearings and further status hearings. Most recently, the court ordered the government’s counsel to submit a “Status Report re: decision on action to be taken” by July 18, 2013.

It appears that the government in the Sinovel case is about to start jumping through the same jurisdictional hoops. And in light of that, one might wonder whether criminal prosecution was really the best option for AMSC. To be sure, a federal indictment of a Chinese company for trade secret theft is dramatic and makes a splash in the papers. But is civil litigation more likely to gain for AMSC the justice that it seeks? As we previously reported, a claimant bringing an action for misappropriation of trade secrets in the U.S. International Trade Commission can get a final decision about twice as fast as in federal court and avoid these types of jurisdictional hurdles. With that said, the ITC comes with a major downside: it can’t grant monetary damages. The ITC can only ban companies from importing and selling their goods in the United States. By contrast, in the criminal case Sinovel faces fines up to $5 million, restitution, and forfeiture of property associated with the wrongdoing. And criminal courts tend to take a broader view of what constitutes “restitution” than civil courts do.

AMSC has already been pursuing claims for two years against Sinovel in China, where Sinovel makes most of its profits. According to AMSC and the indictment, Sinovel has installed the allegedly stolen code in only four turbines in the United States, but has installed it in more than 1,000 turbines in China. Under these circumstances, AMSC’s current approach is likely a good one: try to generate some publicity in the United States, hope a criminal action in the United States will give AMSC a shot at the profits Sinovel has been making in China, and hope that the public outcry will push the recalcitrant Chinese courts to take a stand.

Even now, AMSC has the option of pursuing an ITC case against Sinovel in parallel with the criminal case while waiting for the jurisdictional questions to be sorted out. An ITC proceeding could allow AMSC the opportunity to block the import of any product that Sinovel attempts to sell into the U.S. market. And it would seem likely that if AMSC brought suit in the ITC, Sinovel woudn’t appear for fear of creating personal jurisdiction over it for purposes of the criminal action. Because the ITC is far more likely to allow a default to be taken over an absent party than a federal court in a criminal action, AMSC might secure an easy win in the ITC.