Wednesday, 11th March, 2020

Large damages award turns golden kiwifruit thief green

New Zealand court awards nearly $15 million to Zespri in largest ever damages award for plant variety rights infringement.

Practitioners in the plant variety rights (PVR) space now have a second judicial opinion to rely on, nearly 16 years after Cropmark Seeds Ltd v. Winchester International (NZ) Ltd. And what an opinion it is! Zespri Group Limited v Gao & Ors touches on issues of extraterritoriality, scope of protection, damages available, and joint liability. Throw in breach of contract, hearsay, and apparent deceit and misleading of investors, and the opinion from Justice Katz makes for a gripping read.

The case centres on activities related to licenses from Zespri to Mr Gao, his wife Ms Xue, and their business, Smiling Face, to grow Zespri’s PVR-protected kiwifruit.  Katz J found in favour of Zespri on all three causes of action:

1. PVR infringement by Mr Gao
2. PVR infringement by Smiling Face
3. breach of contract.

Background

Zespri controls all kiwifruit exports from New Zealand, and accounts for 30 percent of global kiwifruit sales. In this role, Zespri invests in extensive research and development into new kiwifruit varieties. In 2010, the vine-killing disease Psa (Pseudomonas syringae pv. actinidiae) hit New Zealand, resulting in widespread losses in kiwifruit. Fortunately, Zespri had developed a number of potentially tolerant lines, and was able to commercialise two varieties, called G3 and G9. Zespri obtained protection for G3 and G9 under the PVR Act in New Zealand and in several other countries, including China. These rights expire in 2031.

Mr Gao and Ms Xue immigrated to New Zealand from China, and in 2010 established Smiling Face, just as Psa was taking hold in New Zealand. After nearly giving up on the kiwifruit business, they obtained licenses from Zespri to grow G3 and G9 in New Zealand.

Zespri subsequently learned of G3 and G9 being grown in China and hired private investigators to look into these rumours. Based on evidence from the investigators, Zespri obtained search warrants to investigate Mr Gao and Smiling Face, and sent two Zespri employees to China to look into activities there.

Zespri filed a complaint alleging four categories of PVR infringement, and breach of contract based on the 2013-2014 licenses. The four categories of infringement follow:

1. License and supply of G3 and G9 from Mr Gao and Smiling Face to Mr Shu in China. As part of this count, Mr Gao purported to grant Mr Shu the exclusive right to exploit G3 and G9 in all of China (‘false license agreement’). Mr Gao also supplied G3 and G9 to Mr Shu to grow in China.

2. Joint venture with Mr Yu through a company called Liangshan Yi to grow and sell G3 and G9 in China (‘cooperation agreement’).

3. Joint venture with Mr Yuan to grow and sell G3 and G9 in China. At about the same time, Mr Gao agreed to sell G3 to Mr Li. Mr Li later refused the plants once he learned Mr Gao was not authorised to sell them.

4. Agreement with Mr Yang to operate orchards through Jiashang Agriculture.

Zespri sought $30 million in damages and a permanent injunction for these activities.

Each of these activities provides its own page-turning tangle of events. In paragraph [42] of the opinion, Katz J explicitly addresses Mr Gao’s lack of credibility, saying he treated Mr Gao’s evidence with considerable caution.

Leaving the intrigue aside, the opinion provides substantive guidance on PVR protection.

Extraterritoriality

Because the accused activities were cross-border in nature, Katz J addressed the extraterritorial scope of PVR protection. He acknowledged that there is a presumption against extraterritorial application of a nation’s statutes, but determined that the accused activities originated in New Zealand, as ‘part of a chain of actions that include cross-border elements’. Not accounting for the cross-border nature of the accused activities would undermine the effectiveness of the PVR Act and multilateral UPOV (International Union for the Protection of New Varieties of Plants) regime (paragraph [40]).

Katz J determined that the PVR Act could be applied to the facts of the case. For example, Mr Gao and Smiling Face initiated sales and offers to sell from New Zealand, and entered into the false license agreement, purporting to give exclusive rights in China to Mr Shu, while in New Zealand.

Scope of protection

Katz J addressed two issues in particular about the scope of PVR protection. First, he examined whether the export of a protected variety infringes the PVR Act. The PVR Act does not explicitly include the right to control export, but it is based on the UPOV regime, which was amended to include this right. Katz J agreed with Zespri that export of its valuable G3 and G9 kiwifruit diminished its exclusive rights, and would constitute infringement.

Second, he examined whether an offer to sell constitutes infringement. This issue arose in the context of activities carried out in New Zealand (the offer occurring in New Zealand, and the particular sale occurring in China), and in the context of the interaction with Mr Li, who did not actually buy the G3 and G9 offered by Mr Gao. This turned out to be an easier determination, as the PVR Act defines ‘sale’ as including offers to sell.

Concurrent and joint liability

The false license agreement with Mr Shu and the cooperation agreement with Mr Yu were signed by Mr Gao on behalf of Smiling Face. Katz J addressed whether Mr Gao and Smiling Face could be concurrently liable for these activities. He determined that as a shareholder and director of Smiling Face, Mr Gao could be concurrently liable with Smiling Face.

The issue of joint liability arose in the context of the breach of contract cause of action. Mr Gao and Ms Xue entered their first license with Zespri 30 July 2013, and further licenses were granted in September 2013 and July 2014. The first two were between Zespri and ‘The Grower’, defined as Mr Gao and Ms Xue. ‘The Grower’ in the third license was defined as Xia Xue and Haoyu Gao Partnership.

Katz J found that while ‘The Grower’ was singular, the only sensible conclusion would be that Ms Xue and Mr Gao were acting as partners, and jointly liable for the breach of contract claim.

Damages

Katz J determined that the harms suffered by Zespri were essentially the same under the PVR violations and the breach of contract. He determined that the ‘user principle’ was appropriate for all three causes of action. The user principle is measured by reference to the economic value of the right which has been breached, considered as an asset.

Section 17(4) of the PVR Act sets out three considerations for calculating damages from infringement:

1. any loss suffered or likely to be suffered by the grantee as a result of that infringement; 

2. any profits or other benefits derived by any other person from that infringement; and 

3. the flagrancy of that infringement.

Katz J focused on the first consideration, and how to evaluate loss suffered or likely to be suffered by Zespri as a result of the unauthorised export and growth of G3 and G9 in China. Zespri proposed using its market value license fee for G3, $171,000 per hectare. Katz J agreed because Zespri is the sole exporter from New Zealand and is charged with maximising the wealth of its New Zealand grower shareholders.

The number of hectares over the various orchards amounted to 174.2 ha. Regarding the ‘likely to be suffered’ element of damages, Katz J noted that there was incentive for expansion of the orchards. In the end, however, he found that it was unlikely that expansion could occur before the 2031 expiry of the relevant PVRs because of China’s membership in UPOV.

Multiplying $171,000 by 174.2 ha results in damages of nearly $30 million, but this was cut in half to reflect that only part of the land was planted.

Damages for each of the two PVR causes of action amounted to $14,894,100. Application of the user principle to the breach of contract claim resulted in damages of $10,824,300. To avoid double recovery, however, the total amount of damages that could be recovered by Zespri was set at $14,8294,100.

Hearsay

The issue of hearsay was raised relatively late in the proceedings, which prompted some admonishment of the defendants by Katz J. The findings on this issue had to be included in a schedule at the end of the rest of the opinion.

Zespri argued to admit evidence from their investigators in China, and from DNA tests carried out in France of samples collected in China. Both sets of evidence were considered inadmissible hearsay, because there was little basis to determine the reliability of the evidence. The evidence was allowed as background context, but not for the truth of its contents.

Katz J was willing to admit hearsay statements made by Mr Shu to Zespri. Mr Shu’s statements were consistent with all previously submitted evidence, and Katz J determined he had no motivation to lie in those statements.

Conclusion

ZespriGroup Limited v Gao & Ors highlights the significant value of PVRs and registered IP rights. While most of the defendants’ activities were clearly unadvisable, it also provides helpful insights about how best to enforce PVR protection. If there is potential infringement outside New Zealand, cross-border activities linking back to New Zealand can be used to capture that extraterritorial activity. This case also shows that PVR protection can extend to prevent export of a protected plant.