The first rule of business is customer diversification. You should never have just one major customer, just in case that relationship sours.

But what happens if you have only one key customer — and that customer steals from you?

That was the nightmare scenario facing the management team at AMSC (NYSE: AMSC). But there is a chance that nightmare will soon end. For a stock that has virtually vanished from investors’ radars, it may be time to take a fresh look.

AMSC, which used to be known as American Superconductor, worked for more than a decade to persuade electric utilities to install its highly conductive wire, which can handle very high power loads with minimal power loss. It’s a great product, but too pricey for most applications, so management eventually tasked the company’s engineers to develop new products for new markets.#-ad_banner-#

Those engineers developed a variety of hardware and software products that enable wind-powered turbines to operate in an extremely efficient manner. It’s a very competitive field, but when Sinovel, China’s largest maker of wind turbines, signed up to be a customer, AMSC’s future brightened. Sales shot up from $52 million in fiscal 2007 to more than $300 million by fiscal 2010. That enabled AMSC to generate its first profits (and positive free cash flow) ever.

Unfortunately, according to AMSC, Sinovel apparently decided to simply replicate AMSC’s wind turbine operating software, and within a few quarters, orders began to dry up. AMSC cried foul, alleging that Sinovel simply stole the company’s technology base, and sued Sinovel in September 2011 in four separate cases. Sinovel — and eventually the FBI — found a number of documents directly implicating several employees at both firms with bribery and theft of trade secrets.

	AMSC is known for its software used to operate wind turbines.

But that legal effort appeared to go nowhere, and the $1.2 billion in damages sought seemed like more bark than bite. Shares eventually plunged more than 90% from their 2009 peaks, which is where they stand today. More than $1 billion in market value has been wiped out.

Apparently, the wheels of justice are finally starting to turn. Here’s a quick recap of recent legal stirrings:

• On May 24 of this year, AMSC announced that China’s Supreme Court has agreed to hear its claims. The purpose of the hearing was to establish jurisdiction, a necessary step to determine which court would eventually try the case. AMSC challenged the Chinese government to handle the case with integrity. John Powell, AMSC’s vice president and general counsel, said: “President Xi Jinping recently said that China will protect legitimate rights of foreign enterprises. AMSC’s cases against Sinovel are the perfect litmus test for whether statements like these are rhetoric or reality. They will help to determine whether China will protect the intellectual property rights of all companies — both foreign and domestic.” 

• On June 27, the U.S. Department of Justice indicted Sinovel and two of its employees, suggesting $800 million in criminal fines. On the news, Sen. Elizabeth Warren (D-Mass.) said: “I call on China to cooperate fully in ending these unlawful practices. Decisive actions on their part will send a positive signal to the United States that China supports fair and mutually beneficial trade relations.”

• During AMSC’s fiscal first-quarter conference call Aug. 7, CEO Daniel McGahn said the company is “awaiting our first substantive hearing in our trade secrets case. For both of our software copyright infringement cases, China Supreme People’s Court heard arguments from both sides in May, and we continue to wait for the court to determine the appropriate jurisdiction. We continue to be hopeful that a decision on the jurisdictional issues will be rendered in the coming months.”

So what happens next? Very little, which is why this stock hasn’t moved much since the legal action heated up. It could be several quarters before Chinese courts establish jurisdiction and set a trial date. As for AMSC’s $1.2 billion claim, it’s hard to see how that will be the end result, as Sinovel would likely prefer to bog the case down in courts for years, knowing that AMSC lacks the financial resources for a protracted legal battle. 

But the case is becoming a serious black eye for the Chinese government, and the quickest path to a resolution would be a settlement offer for $100 million or $200 million. If that happens, AMSC should take the money and run.

Meanwhile, two years after the Sinovel debacle, AMSC’s management is now focused on rebuilding a broken business. Sales have started to rebound as the company finally broadens its customer base in the clean energy field. And thanks to deep cost cuts, AMSC’s burn rate has been radically reduced. Still, shares are unlikely to move higher on actual operating results until AMSC can move back to break even. (For a further explanation of the company’s growth strategy, check out this article at Seeking Alpha.)

Risks to Consider: AMSC is burning roughly $10 million per quarter and has $30 million in the bank. So if a legal victory isn’t in hand by year’s end, the company may need to raise fresh capital.

Action to Take –> This is a high-risk, high-reward opportunity and should be a small part of your portfolio. But if AMSC secures a $100 million or $200 million legal victory, shares would quickly double or more, as the company would have more time and resources to invest its current growth initiatives.

P.S. — AMSC and its investors would surely like to know how its trade secrets case will turn out. In comparison to an opaque court ruling, our predictions are straightforward — and have a history of delivering double- or even triple-digit returns to investors. To read our latest report, click here.