In Zespri Group Limited v Haoyu Gao [2020] NZHC 109, the High Court of New Zealand found Haoyu Gao to have infringed the Plant Variety Rights of Zespri and awarded damages of over NZD$10 million to the plaintiff.

The High Court of New Zealand

Judge: Katz J

Date of Judgment: 10 February 2020

Zespri Group Limited (“Zespri”) controls 30% of global kiwifruit sales. In 2015, kiwifruit was New Zealand’s largest horticulture export after wine amounting to NZ$1.2 billion. In 2010, there was an outbreak of a strain of virus known as Psa that affected the Hort16A variety of gold kiwifruit. G3 and G9 varieties of the gold kiwifruit were developed after years of research and at significant cost. The G3 variety (known as SunGold) is Psa tolerant and since the introduction of the G3 variety, demand for the fruit has grown rapidly. 

s 17 of the Plant Variety Rights (“PVR’) Act 1987 in New Zealand grants the proprietor an exclusive right to (a) produce for sales, to offer to sell, and to sell G3 and G9 reproductive material; (b) to propagate G3 and G9 for the purposes of the commercial production of kiwifruit; and (c) to authorise any other person or persons to do any of those things. The PVR will be in force for 23 years from the date of the grant in the case of kiwifruit and the grantee will have proprietary rights and any infringement of these rights shall be actionable accordingly and damages can be sought. The court will take into consideration – (a) any loss suffered or likely to be suffered by that grantee as a result of that infringement; and (b) any profits or other benefits derived by any other person from that infringement; and (c) the flagrancy of that infringement.

Material Facts

In 2010, Mr. Gao Haoyu (“Mr. Gao”) and Ms. Xia Xue (“Ms. Xue”) immigrated to New Zealand from China and set up a kiwifruit contracting business through Smiling Face Limited (“Smiling Face”). A total of three G3 licences were granted to Mr. Gao (and Ms. Xue) to grow G3 variety of kiwifruit in their own orchard in New Zealand between 30 July 2013 and 30 July 2014. 

In 2016, Zespri got wind of the fact that there was unauthorised planting of G3 and/or G9 varieties of kiwifruit in China. Zespri sent private investigators into China and subsequently their own staff Shane Max and Sheila McCann Morrison to China to investigate the matter. Investigations by Zespri led them to Shu Changqing (“Mr. Shu”), a kiwifruit grower (unauthorised by Zespri) who admitted he was growing G3 and G9 varieties in his orchards in China. 

Zespri filed police complaints and got search warrants to go through Mr. Gao and Smiling Face Limited and further obtained court orders to clone Mr. Gao’s computer and led them to discover that Mr. Gao and Mr. Shu were linked. 

Zespri took Mr. Gao to court for the following:

Infringement grouping 1 – Zespri alleged that Mr. Gao and Smiling Face entered into an agreement (“False Licence Agreement”) on the 8 August 2012 (later found to be October 2012 instead) to supply G3 and G9 varieties of kiwifruit to Mr. Shu, granting Mr. Shu authority to exploit G3 and G9 for the whole of China. 

The High Court made these findings based on evidence tendered:

• Mr. Gao provided G3 and G9 plant material to two Chinese growers, Mr. Shu (in 2012) and Mr. Yu (in 2014). 
• Mr. Gao signed the False Licence Agreement and receipt while in New Zealand.

Infringement grouping 2 – Alleged Joint Venture with Mr. Yu (Liangshan Yi) that led to signing of a Co-operation Agreement dated 21 September 2014 (on behalf of Smiling Face Limited) and the development of a 6 ha “demonstration park” in Xichang on which G3 had been planted.

The High Court made these findings:

• Mr. Gao entered into a joint venture with Mr. Yu to exploit G3 and G9 varieties commercially in China through Liangshan Yi. 
• Mr. Gao invested around $70.000 in that joint venture. 

Infringement grouping 3 – Alleged joint venture with Mr. Yuan. Mr. Gao and Mr. Yuan agreed, in a Co-operation Agreement dated 1 November 2015 to exploit and sell G3 and G9 in China. Mr. Gao admitted he offered to sell G3 to a Li Xiangyong (“Mr. Li”) via Wechat. Mr. Li withdrew from the agreement after learning that Mr. Gao was not authorised to sell G3 and/or G9 in China. 

Held: The circumstantial evidence fell short of establishing infringing conduct on balance of probabilities in this group. 

Infringement grouping 4 – Jiashang’s Agriculture’s orchard beneficially owned by Mr. Gao. Zespri alleged that Mr. Gao and Mr. Yang Qian (“Mr. Yang”) agreed to operate orchards through Jiashang Agriculture (a company owned 99 per cent by Mr. Gao and 1 per cent by Mr. Yang). 

Held: The circumstantial evidence fell short of establishing infringing conduct on balance of probabilities in this group. 

Allegations against Mr. Gao and Ms Xue

Zespri alleged that Mr. Gao and Ms Xue breached the terms of the G3 licence agreements granted to them in 2013. 

The Court of Appeal in Cropmark Seeds Ltd v Winchester International (NZ) Ltd held that although the vendors of the Optic seed had infringed Cropmark’s exclusive right depriving it of potential royalties, Mr. Winchester and his company had also diminished Cropmark’s enjoyment of its exclusive right, by helping to arrange the relevant sales. 

Issues of Extraterritorial Application

The case raised issues of territoriality as Mr. Gao and Smiling Face were allegedly engaged in conduct that was cross-border in nature. The High Court took the view that any infringing conduct that was carried out within New Zealand fell within the jurisdiction and the infringer/s is/are liable for damages. 

First cause of action: Did Mr. Gao breach Zespri’s PVR rights?

The High Court found:

1. Mr. Gao offered to sell, sold and exported G3 and/or G9 budwood to Mr. Shu in 2012 and Mr. Yu/Liangshan Yi joint venture around 2014. (in NZ)
2. Mr. Gao offered to sell G3 to Mr. Li in 2015. (in NZ)
3. Mr. Shu, Mr. Yu and Mr. Li accepted Mr. Gao’s offers. (in China)
4. Mr. Gao entered into agreements to supply G3 and/or G9 budwoods to Mr. Shu and Mr. Li. (in NZ)
5. Mr. Gao prepared G3 and G9 material for export to China, including growing and/or harvesting the relevant material, preparing it for transit and making shipping arrangements to China for Mr. Shu and Mr. Li. (in NZ)
6. Mr. Gao signed the False Licence Agreement with Mr. Shu and Receipt. (in NZ)

The above (1), (2), (4), (5), (6) occurred in New Zealand and fell within the jurisdiction of New Zealand.

Can the export of a protected variety infringe PVR rights?

Zespri’s exclusive rights under the PVR Act (which is based on UPOV 78) does not include an express right to control the export of their protected plant varieties. However, the High Court accepted Zespri’s submissions and held that unauthorised export of the G3 and G9 varieties does diminish the enjoyment of Zespri’s exclusive rights and thus constitute infringing conduct. 

Can an offer to sell a protected variety infringe PVR rights?

The PVR Act expressly defines “sale” as including offers to sell [132]. Regardless of whether an actual sale has been concluded, the act of instigating an offer, in New Zealand to an overseas party constitute an infringing conduct. 

What consequences have flowed from Mr. Gao’s relevant acts in New Zealand?

G3 and/or G9 varieties of Kiwi fruit have flowed into China uncontrollably. These came at Zespri’s expense of years of research and significant research cost. Mr. Shu used the False Licence Agreement to obtain funding for growing the G3 and G9 varieties in orchards and sold the kiwifruit in China. Mr. Shu had misled authorities in China into believing that the Licence Agreement was legitimate and that he was duly authorised to plant the G3 and G9 throughout the whole of China, growing the kiwifruit varieties into 4 orchards over a period of only four years. 

How have these consequences impacted Zespri?

The illegal propagation of G3 and G9 varieties of kiwifruit hurt Zespri’s reputation with its inferior fruit grown in China. Zespri would have to compete with illegally grown G3 and G9 from China affecting their sales revenue worldwide. Zespri would also have to spend significant amount of money, investigating illegitimate kiwifruit growers in China

The High Court held that first cause of action has been established for infringement groupings 1 and 2.

Second cause of action: Did Smiling Face breach Zespri’s PVR Rights under the PVR Act in G3 and/or G9?

The High Court found Smiling Face liable for infringement groupings 1 and 2. Mr. Gao signed the False Licence Agreement as agent for Smiling Face. For infringement grouping 2, Mr. Gao signed the Co-operation Agreement on behalf of Smiling Face and evidence tendered supported the conclusion that this Co-operation Agreement is genuine. Accordingly, the High Court held that the second cause of action has been established. 

Did Mr. Gao breach the licence agreements?

As of 30 July 2013, Mr. Gao knew about Mr. Shu’s illegal activities concerning G3 in China. Mr. Gao was obliged to report to Zespri pursuant to the terms of the licence agreements but did not do so.  

The High Court found that Mr. Gao had entered into joint venture with Mr. Yu for the Liangshan Yi joint venture to exploit the G3 and G9 varieties. Mr. Gao was to supply G3 material to the joint venture to propagate and sell to third parties as Psa resistant kiwifruit variety. Mr. Gao subsequently supplied G3 material and they were planted in the Liangshan Yi orchard. In November 2015, Mr. Gao agreed to provide G3 budwood to Mr. Li (whether the deal went through was irrelevant).

The High Court found that the licence agreements were executed between Zespri and “the Grower”. The “Grower” was represented by Xia Xue and Haoyu Gao as partners of Xia Xue and Haoyu Gao partnership. The High Court in finding Mr. Gao liable for breach of the licence agreements also found Ms. Xue jointly liable in the breach of the G3 licence agreements for failing to report to Zespri about Mr. Shu’s illegal activities in China. 

In assessing the damages sought by Zespri, the High Court adopted the “user principle” approach where the damages were assessed based on a “royalty” for the unauthorised sale of the plaintiff’s intellectual property. The High Court applied the ‘reasonable’ charge or licence [159], using the market value of a G3 licence in 2016 in New Zealand at $171,000 per ha (GST exclusive). In arriving at the final value for damages for the first cause, the High Court took the total area of the orchards which G3 and G9 have been grown in China totaling 174.2 ha (Chibi – 1.3 ha, Xianning 1 – 13.3 ha, Xianning 2 – 33 ha, Wuhan – 120 ha, Xichang (demonstration park) – 6.6 ha) and multiply the total area by $171,000. The High Court applied a 50 per cent discount as not the entire area will be covered by G3/G9 varieties and arrived at a figure of $14,894,100. The amount of $14,894,100 was also applied to the damages due to second cause of action. The High Court adopted the same “user principle” approach in arriving at the damages for the third cause of action. The relevant land area was 126.6 ha (Wuhan – 120 ha, Xichang – 6.6 ha) and this resulted in a damage amounting to a total of $10,824,300(NZD) after taking into account a 50 per cent discount.

Admissibility of Evidence 

The counsel for the Gao took issue with the evidence tendered by Zespri and objected to the admissibility of some of the evidence on grounds that they were hearsay statements.  

Statements by Zespri’s investigators to Zespri’s witnesses – Zespri’s investigators were not present as witness in court for fear of repercussions it would have on them and their families. The High Court ruled that statements made by Zespri’s investigators were therefore inadmissible hearsay and cannot be relied upon for truth of their contents, only as background evidence. 

Statements made directly by Mr. Shu to Zespri’s witnesses – The High Court ruled the statements made directly by Mr. Shu to Zespri’s witnesses as hearsay statements and Justice Katz was satisfied that the circumstances relating to the statements made by Mr. Shu provided reasonable assurance that they were reliable. That satisfies first limb of s 18 of the Evidence Act 2006. Justice Katz noted Mr. Shu was unavailable as a witness (he is outside New Zealand and it is not reasonably practicable for him to be a witness) thereby satisfying the second limb of s 18 of the Evidence Act 2006, the High Court ruled the statements made directly by Mr. Shu to Zespri’s witnesses as admissible hearsay.

DNA Evidence – As none of the witnesses from the laboratory that was used for the testing of plant samples taken from the orchards in China came forward to prove the DNA results nor did Zespri sought to include those DNA results under s 9 of the Evidence Act 2006, the High Court ruled these statements as inadmissible hearsay. 

The case is on appeal and scheduled to be heard in the New Zealand Court of Appeal in April 2021. 

Disclaimer: The above is provided to assist in the understanding of the decision by the High Court of New Zealand. It should not be relied upon as legal advice. Any errors or omissions are the author’s. For queries related to the article, please contact the author here.