Issue Date: May 28, 2012
A Murky Case Of Technology Theft
Two companies—one U.S. and one Chinese—are embroiled in a bitter legal feud in Chinese courts. Each side accuses the other of stealing technology for the production of an important resin used in tire manufacturing. The outcome of the case will affect the market positioning of the companies in a country that has become the world’s largest producer of tires.
On one side of the case is SI Group, a Schenectady, N.Y.-based firm that claims its main competitor in China has built a plant implementing its proprietary know-how for making phenolic tackifying resins. On the other side is Sino Legend Chemical, based in the eastern Chinese city of Zhangjiagang. It accuses SI of using legal trickery to try to stop the rising competitor and steal its technology.
Industry observers say they don’t know what to believe and they are leaving it up to Chinese courts to decide where the truth lies. “We are familiar with the background of this case, but it’s complicated and I couldn’t tell you who’s right and who’s wrong,” says Keqiang Wang, chairman of the Chinese Phenolic Resin Association.
To hear SI officials, the evidence of trade theft is so straightforward that any judge would rule in its favor. “The facts are there, like black is black and white is white,” says Oliver Lu, managing director of SI in China.
SI calls itself the world’s leading producer of phenolic resins and claims to have developed its tire tackifying resin know-how over the past 25 years. SI got its start in China by selling imported resins via a local distributor, Red Avenue Chemical. After SI opened a phenolic resins plant in 2004 in Songjiang, a suburb of Shanghai, it stopped using Red Avenue as its sole distributor. In response, SI says, Red Avenue managers created Sino Legend.
The new company launched in 2006. In May 2007, Sino Legend hired Jack Xu, who was the manager of SI’s Songjiang plant. According to Lu, it was Xu, one of only two Chinese employees to have full access to SI’s technology, who enabled Sino Legend to begin production in 2008 of tire tackifying resins with properties similar to those that SI produced.
“Sino Legend uses a 17.5-m3 reactor, the same size as ours. They use the same type of filtration system, and they source the same catalyst as ours,” Lu says. “How could they have learned to do this in such a short time?”
If black is black and white is white, then the story Sino Legend tells is the exact opposite of the SI version. There can be no doubt that Sino Legend developed its own tackifying resin technology, according to Albert Shi, the firm’s deputy general manager. “We believe this legal action was initially motivated by SI losing market share in China,” he says.
Sino Legend’s chief scientist, Qijun Pu, spent decades researching phenolic resins for tackifying and other uses at the state-owned Beijing Research & Design Institute of Rubber Industry. “We have copies of all of Dr. Pu’s original notebooks,” Shi says, pointing at stacks of folders on a desk.
There are gaping holes in the accusations made by SI, Shi contends. He explains that when Sino Legend hired Xu in 2007, the company had already supplied local authorities with detailed plans for its production facilities in order to obtain a manufacturing permit. “Xu was experienced, he was available, and there was no no-compete clause in his employment contract with SI,” Shi says. Xu was not involved in designing Sino Legend’s plant, Shi adds.
If technology theft did take place, Sino Legend was the victim, Shi claims. In 2008 and 2009, after SI complained to Shanghai authorities that Sino Legend had stolen its technology, the Chinese company provided regulators with detailed information concerning its production process. This initial investigation did not result in criminal charges against Sino Legend. But Shi claims the information it submitted ended up in the hands of SI, which eventually implemented some Sino Legend technology at its facilities.
“They are now using our technology in the area of water treatment, raw material usage, and production flow,” says Corey Xie, Sino Legend’s general manager in Zhangjiagang. To prove that Sino Legend is not making this accusation lightly, Xie provided C&EN with legal documents indicating that his firm has initiated a lawsuit against the Shanghai Science & Technology Consulting Service Center (SSTCSC), the government agency that evaluated Sino Legend’s technology. “SI’s implementation of our technology improves their production costs,” Xie says.
At SI, Peter Schrecker, director of the company’s global rubber business, is surprised that Sino Legend would actually proceed with suing the government agency. Even though the initial investigation did not result in criminal charges against Sino Legend, government investigators did confirm that the companies were using identical production processes, Schrecker says. “If the technology is identical, we cannot have improved it,” he snaps.
Sino Legend did not develop its own tire tackifying resin technology, Schrecker claims. “The professor they mention did develop phenolic resins but not the specific resin in question here,” he says. It’s Xu, the former SI plant manager, who helped Sino Legend gain its expertise, Schrecker says.
Countering Sino Legend’s claim that Xu was free to work anywhere after leaving SI, Schrecker says Xu had signed confidentiality and noncompete agreements as part of his SI employment contract. “It’s possible Sino Legend is unaware of that,” Schrecker speculates.
Now The companies are suing one another. SI initiated a civil case of technology theft this year in the Shanghai No. 2 Intermediate People’s Court, which has handled intellectual property cases in the past. And Sino Legend is countersuing SI for the improper upgrades it says the company made to its facilities after obtaining confidential information through SSTCSC.
It’s not clear how long it will take for the courts to rule. SI’s legal counsel, who declined to be identified by name, says Chinese courts are relatively fast but that the case is dragging on partly because Sino Legend is not providing information proving that it acquired its technology by fair means. “The judge will have to decide what to do about the deadlines that Sino Legend has missed,” Schrecker says.
Outside the legal system, the two companies are fighting one another by various means. Sino Legend has complained to Shanghai environmental authorities that SI’s facilities did not have a water treatment system until 2009, thus releasing phenolic waste to the environment and possibly contaminating the output of a nearby bottling plant.
Lu counters that SI sent its wastewater to a reputable remediation firm before building its water treatment plant. Shanghai authorities, he points out, have thoroughly audited SI facilities and even awarded the company a prize for its environmental practices and low energy consumption.
Sino Legend’s Shi alleges that SI has sent intimidating letters to customers warning them that they may not be able to obtain tackifying resins at all if SI wins against Sino Legend. Schrecker says it is absurd that SI would refuse to supply companies that have supported Sino Legend by buying its materials.
SI, meanwhile, is trying to politicize the issue by petitioning the U.S. government for assistance, Sino Legend contends. “Sino-U.S. relations have become part of the case, and so the courts in China hesitate to rule,” Xie claims. Schrecker flatly denies the charge of politicization. “We don’t play the Chinese versus U.S. card,” he says. “We play by Chinese rules because we are part of the Chinese business world.”
Still, last week SI filed a complaint with the U.S. International Trade Commission requesting an investigation and the banning of Sino Legend tackifying resin from the U.S. Sino Legend’s Xie comments that SI is now trying to stop his firm from entering the U.S. market. “If they felt confident about their case against Sino Legend in a Shanghai court, they wouldn’t need to file” this investigation against the company, he says.
Both companies produce various phenolic resins, but tackifying resins for tires are particularly important to both firms. The feud between them is taking place in a country that has become the world’s largest producer of tires. Last year, for example, China accounted for about 60% of world production of bus and truck tires, Xie says. SI, Sino Legend, and Japan’s Sumitomo Bakelite are the major producers of tire tackifying resins, he adds.
The firms should get a balanced hearing, notes David Jiang, president of the Beijing-based chemical market research firm Sinodata Consulting. He says that courts in Shanghai are more sophisticated, and therefore likely to be fairer, than courts in other parts of China.
“But this is a common issue among Chinese companies,” he says. “A key employee leaves, builds a plant that competes with his former employer, and you have a lawsuit.” It will be up to the courts to decide whether this pattern is at play or if it is something more.
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