Zespri’s Plant Variety Rights litigation bears fruit

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Variety is the spice of life

The High Court has recently released New Zealand’s second ever plant variety rights (“PVR”) infringement decision, (mostly) in favour of Zespri Group Limited (“Zespri”).

In 2009 Zespri successfully registered rights in new Psa-resistant varieties of gold kiwifruit called G3 and G9 (known commercially as SunGold and Zespri Charm respectively) under the Plant Variety Rights Act 1987 (“PVR Act”).  These PVR Act rights allow Zespri to exclusively commercialise its kiwifruit varieties in New Zealand and overseas, and it strictly controls these rights.

What happened?

Mr Gao was a grower for Zespri who set up an orchard in Ōpōtiki in 2010. When Psa struck, it hit Mr Gao and his partner, Ms Xue, hard. In 2012, Mr Gao began negotiations in China with kiwifruit industry veterans and interested growers in order to “license” and “sell” Psa-resistant gold kiwifruit varieties as way to ease financial stress.

Subsequently, orchards of planted G3 and G9 varieties appeared in China, the largest being 120 hectares.

In 2016 Zespri became suspicious and investigated.  As a result of its investigation, in 2017 Zespri sued Mr Gao, Ms Xue and their company Smiling Face, for breaching its rights under the PVR Act.

Zespri’s case

Zespri argued that, between 2012 to 2016, Mr Gao:

  • had offered to sell G3 and G9 varieties;
  • engaged in two joint ventures to run orchards where he supplied the G3 and/or the G9 variety;
  • tried to licence the rights to G3 to a Mr Shu; and
  • beneficially owned an orchard in China also producing G3 or G9 that came from samples he provided.
Mr Gao’s defence

Mr Gao argued that:

  • he had not taken any varieties out of the country;
  • Mr Shu knew he did not have the authorisation to licence G3 and G9; and
  • the varieties referred to in agreements and the offers to sell were not the G3 or G9 varieties.
China, or New Zealand?

The High Court faced a dilemma because the planting and growing occurred in China but some of the agreements and arrangements were made in New Zealand. The Court had to decide if New Zealand was the correct jurisdiction to hear the case and concluded that it was.

The Court considered that any conduct, including conduct forming part of a chain of events, that occurred in New Zealand that diminished Zespri’s exclusive rights is infringing conduct that it has jurisdiction over.1

Significantly, the High Court ruled that exporting a protected variety (such as G3) also infringed rights under the PVR Act.2]

What the High Court found

The Court grouped the many allegations into four sets – one set based on each venture Mr Gao dealt with. Zespri succeeded on two sets and failed to prove the remaining two.

Fruitful:

1 – License and supply to Mr Shu

Zespri could not prove directly that Mr Gao exported cuttings of its G3 and G9 varieties to China for Mr Shu. Instead it relied on:

  • A “licence agreement” dated October 2012, signed by Mr Gao and Mr Shu, purporting to authorise Mr Shu to grow and sell G3 and G9 in China, found when Zespri executed search warrants; and
  • Evidence given by Zespri’s upper management who visited Mr Shu’s orchards in 2016 and identified G3 and G9 on those orchards.

Mr Shu showed Zespri four orchards which he owned, all four orchards had G3 growing on them and some contained G9. The timing of the planting at one of the orchards coincided with when Mr Gao travelled to China to sign the licence agreement with Mr Shu.

Mr Gao argued that the licence agreement was created to deceive investors so that Mr Shu and himself could make money and denied smuggling the varieties out of New Zealand. The Judge was not convinced by this.

The evidence showed that Mr Shu found out in 2016 that Mr Gao did not have the right to licence G3. Mr Shu’s panicked messages to Mr Gao after finding out, and the age of the fruit on Mr Shu’s orchards, indicated Mr Gao was the most likely source of the fruit.

2 – Joint venture 1: Mr Yu / Liangshan Yi

The Court found that in 2014 Mr Gao and a further party, namely Mr Yu, agreed to engage in a joint venture to grow and sell G3 in China.

Mr Gao, on behalf of Smiling Face, signed a “co-operation agreement” with Mr Yu. Through a further company, Liangshan Yi, this venture was to plant ‘Psa-resistant overseas variety’, provided by Mr Gao, in a 6ha ‘demonstration orchard’ in Xichang.

The Court did not accept Mr Gao’s arguments that the variety was not G3 and that the joint venture did not proceed. The joint venture acquired land to run an orchard on, and Mr Gao borrowed funds to invest in the joint venture. This evidence, along with orchard inspections revealing G3 growing, and the evidence against set 1, all indicated Mr Gao more likely than not provided the G3 variety to the joint venture.

The Court also found that Mr Gao offered to sell G3 to a Mr Li, in relation to this venture.

Fruitless:

The remaining allegations were dismissed because Zespri could not prove them, but the Judge still recorded her “strong suspicions” about some.3

At what cost?

The Court determined that the “user principle”, which is a potential royalty lost by Zespri on the orchards the Mr Gao had planted, was the best way to calculate damages.

Zespri gave evidence that it licenced its rights based on available hectares to plant; the judge accepted this and awarded $14,894,100 in damages against Mr Gao, Ms Xue, and Smiling Face. The Judge also granted a permanent injunction to prevent Mr Gao, Ms Xue and Smiling Face from further breaching Zespri’s PVR rights.

1. Zespri Group Limited v Gao [2020] NZHC 109 at [38]-[39], and [196].
2. At [130].
3. At [113].