Three former Huawei Technologies Co. Ltd. and UTStarcom Inc. (Nasdaq: UTSI) employees in China are heading for jail after they were found guilty of stealing Huawei's trade secrets. The three engineers, convicted by a District Court in Shenzhen Nanshan this week, will face up to three years in prison and fines of up to 50,000 yuan (about US$6,000), according to the Xinhua News Agency.

But some say the case isn't so much an occurrence of intellectual property theft as it is that of competitors asserting their dominance in the courts and, by extension, the government and the region, rather than in the marketplace.

The men accused of stealing and selling Huawei's trade secrets are Wang Zhijun, Liu, Ning, and Qin Xuejun. Each had worked in Huawei's optical networking technology division before striking out on their own to start a small company called Shanghai Huke in late 2001. (The company is referenced as Shanghai HoKo in UTStarcom's SEC filings.)

According to reports, Shanghai Huke began to recruit Huawei employees and it started promoting its optical networking gear -- SDH transport gear, specifically -- within 6 months of the company's inception. Interestingly, the company was said to be developing this gear in cooperation with Alcatel Shanghai Bell Co. Ltd., an Alcatel SA (NYSE: ALA; Paris: CGEP:PA) subsidiary.

In 2002, Huawei accused the three engineers of using its trade secrets to develop Shanghai Huke's products.

Here's where it gets murky. One source in China says Shanghai Huke was developing the products that would become the base of UTStarcom's NetRing products. UTStarcom acknowledges its purchase of Shanghai Huke and says the company's technology "was immediately integrated into UTStarcom's technology so there is no way to know exactly which product" is based on Shanghai Huke's technology.

UTStarcom says it bought Shanghai Huke's assets and some personnel in October 2002. But the company's involvement in this case is hard to pin down.

The vendor declined to comment when questioned about its involvement in the case, saying that the case wasn't related to its operations. But the company apparently gave statements to the Chinese press expressing concerns in the Huawei matter. One such alleged statement was quoted in a November 24 report from the Interfax News Agency, and reads: "Although the alleged criminal activities that three individuals have been accused of have no relationship with UTStarcom, and the fact that these activities happened before these individuals joined UTStarcom, we have continued to pay close attention to the legal rights of these employees as they were already our part of our staff before they were detained by police."

According to a source close to the defendants' attorney, Shanghai Huke's gear was built between November 2001 and May 2002, almost in parallel to the similar Huawei gear, which was built from May 2001 to June 2002. Shanghai Huke's product even went to market earlier than Huawei's, the source says.

Despite the timing of the technology, many watching the case say the real trigger for Huawei's suit was not the technology, nor its backers, but the technology's final home.

Liu and Wang founded the Huke company in Shanghai, but received financial support from Alcatel Shanghai Bell early on, a source close to the case explains. Later, the vendor stopped funding Huke and UTStarcom swooped in shortly thereafter. And that appears to be when Huawei got interested.

"The flow of technical personnel between Huawei and its competitors occurs often, but this is the first time Huawei has taken legal action against its former employees," according to a November report by the Interfax News Agency.

"The suit is, in fact, a battle between Huawei and UTStarcom. If any other company had purchased Huke, other than UT, the suit would not have happened," writes a source in Shenzhen who is close to the case.

Huawei declined to comment on anything to do with UTStarcom, noting that this was a criminal case, not a civil one, against former employees accused of stealing company secrets. "We're glad the court made the decision it did," says Richard Lee, a Huawei spokesman. "We think the result demonstrates that innovation, and intellectual property, is highly respected in China."

— Phil Harvey, News Editor, Light Reading