GAO v ZESPRI GROUP LIMITED

 

Court of Appeal of New Zealand

Kós P, Brown and Goddard JJ

27 April 2021, 7 September 2021

[2021] NZCA 442

Plant Variety Rights – new varieties of G3 and G9 kiwifruit – PVR registrations held in New Zealand and China – action in New Zealand for breach of New Zealand PVR registrations – first appellant exported budwood to China – first appellant purported to license rights to G3 and G9 kiwifruit for whole of China – hearsay  evidence – adverse credibility findings - extraterritorial issues – actions partly in New Zealand partly in China– liability for breach of PVR where actions in New Zealand diminished exclusive rights conferred within New Zealand – joint liability of company – damages – “user” principle upheld - s 17 Plant Variety Rights Act 1987 (NZ) – S18 Evidence Act 2006 (NZ)

Facts:

On behalf of kiwifruit growers Zespri controlled all kiwifruit exports from New Zealand to countries other than Australia.  It accounted for around 30% of global kiwifruit sales.  In 2015 kiwifruit was New Zealand’s second largest horticultural export with receipts of $1.2 billion.

Zespri held exclusive plant variety rights to two gold kiwifruit varieties, G3 and G9, under the Plant Variety Rights Act. These were valuable as they were resistant to PSA virus. In 2009 it registered similar rights in the United States and in 2010 it applied for registration in various other countries including China.  Those rights were subsequently granted. 

As a result of investigations in China on behalf of Zespri by a Mr Max and Ms McCann Morrison, and statements by a Mr Shu (a kiwifruit grower in China), Zespri came to believe that, from 2012 the first defendant, Mr Gao, had exported G3 and G9 plants to China, purported to license these for the whole of China and engaged in conduct that breached Zespri’s rights. 

Zespri brought proceedings in New Zealand against Mr Gao, his wife Xia Xue and their company, Smiling Face Limited.  The first two causes of action were that Mr Gao (either in his personal capacity or on behalf of Smiling Face Limited) had breached the PVR Act.  The third cause of action alleged that Mr Gao’s supply of G3 to Chinese growers (and related activities) breached the G3 Licence Agreements that Zespri had granted to Mr Gao and Ms Xue in relation to their own kiwifruit orchard in New Zealand that they had purchased in 2013.

High Court Decision:

In a judgment delivered in February 2020, Katz J held Zespri had proved that Mr Gao and Smiling Face Limited had:

(a)       supplied G3 and G9 to Mr Shu (and purported to license him to exploit those varieties throughout the whole of China);

(b)       entered into a joint venture to exploit and sell G3 and G9 in China with a Mr Yu (including planting a 6 ha “demonstration park” in Xichang in Sichuan, China on which G3 supplied by Mr Gao was planted), and

(c)       offered to sell G3 to a Mr Li, while also finding that

(d)       Mr Gao and Ms Xue breached the terms of their G3 Licence Agreements with Zespri

The Judge awarded damages of NZD$14,894,100 against Mr Gao and Smiling Face Limited each for (a) to (c) above (acts which infringed Zespri’s statutory rights). The Judge also awarded damages of NZD$ 10,824,300 against Mr Gao and Ms Xue jointly for (d) ie breach of contract.

Plant Variety Rights Act 1987

A Plant Variety Right (PVR) lasts for 23 years from the date of grant in the case of woody plants and their root stocks, including kiwifruit varieties.  The holder of a PVR may bring civil action against anyone infringing it [6]-[11].

One of the key issue on appeal (Issue 5) was whether the trial judge had applied the PVR Act extra-territorially.

In the High Court the following acts were found to have occurred in New Zealand:

(a)  Mr Gao’s offer to sell G3 and G9 budwood to Messrs Shu, Yu and Li;

(b)  Mr Gao’s execution, on behalf of Smiling Face, of the False Licence Agreement prepared by Mr Shu; and

(c)   in the case of the sales made to Messrs Shu and Yu, preparation of the G3 and G9 budwood for export, including growing and/or harvesting it, preparing it for transit, making and implementing shipping arrangements (or packing it in his luggage, if Mr Gao carried it personally).

Acceptance of the offers in (a), making of the offer (by Mr Shu) to enter the False Licence Agreement in (b), and receipt of the G3 and G9 budwood in (c) (by Messrs Shu and Yu) all occurred in China.

The trial Judge held s 17 of the PVR Act gave Zespri the exclusive rights:

(a)  to produce for sale, to offer to sell, and to sell G3 and G9 reproductive material;

(b)  to propagate G3 and G9 for the purposes of commercial production of kiwifruit; and

(c)   to authorise any other person to do (a) or (b).

The appellants submitted while there was “no doubt” Zespri’s Chinese PVRs had been infringed, those rights were not pleaded as the basis for the appellants’ liability, and therefore the claims should be dismissed [103]. The appellants said this had four legal consequences:

 

(a)  The relevant PVRs did not create an exclusive right in Zespri to produce for sale, and to sell, G3 and G9 in overseas jurisdictions, propagate G3 and/or G9 for the purposes of commercial production in overseas jurisdictions or authorise or licence any other persons to do those things in overseas jurisdictions.

(b)  Zespri’s pleaded claims related to its PVRs in New Zealand; there was no claim advanced based on breach of PVRs in China.

(c)   An act done in New Zealand purporting to authorise commercial sale and propagation of G3 and G9 outside New Zealand — such as execution of the False Licence Agreement — could not infringe Zespri’s New Zealand PVRs.

(d)  Taking the three preceding points together the Judge could not award damages based on a notional licence fee for plantation of the two varieties in China. The infringing conduct “could only have infringed … and diminished the value of Zespri’s Chinese [PVRs], which has not been pleaded”.

Zespri submitted its claim “was solely against appellants within the personal jurisdiction of the High Court (New Zealand residents and a New Zealand-registered company), for actions undertaken by them in New Zealand. The basis of the claim, and the judgment, was said to be the imposition of liability for infringing acts that occurred in New Zealand.

A second key issue (Issue 6) was whether the trial judge had erred in fixing damages.

The trial Judge had accepted Zespri’s submission that, once infringing conduct in New Zealand was proven, it was entitled to full compensatory damages. That included damages “flowing from exploitation abroad of the domestic acts of infringement committed by Mr Gao and Smiling Face Limited.

When assessing damages, the Judge considered the starting point was the mandatory considerations in s 17(4) including loss suffered, profits or benefits derived, and the flagrancy of the infringement. Section 17(4) required consideration of Zespri’s likely future losses also.

In the High Court, because damages were said to “simply not possible to quantify … on a traditional basis”, the user principle, based on a notional royalty, was adopted. To quantify damages the Judge applied the competitively-established licence fee to propagate G3 in New Zealand (NZD 171,000 per ha) to the 174.2 ha Zespri had shown G3 and G9 was growing on in China.

The Judge then opted to reduce the initial damages amount by 50 per cent to account for the fact that only a portion of each orchard was planted in G3 or G9 and that Zespri could take action to enforce its PVRs in China to mitigate future loss. That gave a damages total of NZD$ 14,894,100. Finally, The Judge also assessed damages for breach of the G3 Licence Agreements via the user principle but applied to the smaller area of 126.6 ha and again discounted by 50 per cent. The result was damages of NZD$ 10,824,300.141. Ms Xue was held jointly liable with Mr Gao for those damages.

The appellants challenged the application of the user principle, and a notional licence fee, to assess damages for the infringement of Zespri’s New Zealand PVRs in circumstances where the propagation notionally licensed was in China. Their submission was that the Judge should have taken an “ordinary and pragmatic” approach to damages, rather than applying the user principle, and that damages under the G3 Licence Agreements ought to be nominal only [129-130].

Held, dismissing the appeal, except in relation to adjustment of damages awarded under first and second cases of action:

Issue One: Did the Judge err in finding hearsay statements made by Mr Shu were admissible? [42] - [54]

  1. The Court agreed with the High Court’s finding that the hearsay statements of kiwifruit grower, Mr Shu, (made during Zespri’s investigations in China) were admissible in evidence under s 18 of the Evidence Act 2006. This was because the circumstances relating to the statements and corroborating evidence met the threshold for reliability [50] [51]. The judge was entitled to accept that Mr Shu was unavailable as a witness [53], because, although Mr Shu was “compellable” under the Evidence Act, he was unavailable, because he was outside New Zealand and it was not reasonably practicable for him to give evidence. Moreover, there was persuasive evidence that he was a co-conspirator with Mr Gao.

Issue Two: Did the Judge err in assessing the size of Mr Shu’s orchards? [55] - [78]

  1. The Judge’s findings as to the size of the four Chinese orchards were based on Mr Max’s and Ms McCann Morrison’s evidence from their visits to China. The size assessed impacted the extent of the damages awarded.
  1. The absence of evidence as to how the witnesses arrived at the inferences as to size did not mean the figures themselves were inadmissible hearsay [68]. Rather, issues as to the lack of explanation as to how the figures were derived went to weight. The evidence as to perceived area was lay opinion evidence admissible under s 24 of the Evidence Act [70].
  1. The Judge erred in finding sufficient evidence proving the size of the Xianning 1 orchard, and had mistakenly stated the Xianning 2 orchard covered 33 ha rather than 13.3 ha, likely due to an error in one of the affidavits. The Court held the Judge did not err in her assessment of the size of the remaining two orchards [78].
  1. Zespri had therefore proved to the required standard that Mr Shu’s orchards totalled 134.6 ha, and Liangshan Yi a further 6.67 ha, totalling 141.3 ha. The exact area of the orchards was not material to liability and was only relevant to the assessment of damages, applying the user principle,(discussed at Issue Six). 

Issue Three: Did the Judge err in making adverse credibility findings? [79]-[88]

  1. The Judge found Mr Gao (the first appellant) a “very unimpressive witness” and considered his evidence lacked credibility “on most of the contentious issues”. The Judge considered Ms Xue (the third appellant) was intelligent and articulate. Her evidence was described as forthright and credible on non-contentious issues, but often lacked credibility on contentious issues. The Court held that something in the nature of a material failure of process or evidence analysis apparent from the written record is needed to overcome the customary caution an appellate court must exercise in assessing the trial judge’s credibility findings [83].
  1. Although the Judge’s error in relation to the identity of Ms Xue (which wrongly attributed to Ms Xue a chemical engineering degree) was of concern, the isolated error concerned a peripheral detail which did not undermine her findings on the credibility of Ms Xue which were far more positive than in relation to Mr Gao and were open to her to make [86].

Cobham v Frett [2001] 1 WLR 1775 (PC) at 1783–1784 referred to.

Issue Four: Did the Judge err in finding the G3 and G9 varieties would not have reached Mr Shu in China but for Mr Gao’s actions in New Zealand? [89]- [96]

  1. In the High Court decision Mr Gao’s offers to sell or provide G3 and G9 were “a necessary precursor” to the subsequent sales and/or provision of those varieties to kiwifruit growers, Mr Shu and Mr Yu in China. Accordingly, if Mr Gao had not taken steps in New Zealand to harvest or obtain G3 and G9 budwood, and then arrange its export, those varieties would never have reached Mr Shu and Mr Yu in China
  1. The Judge’s conclusions were inferred properly from the evidence adduced at trial [96], because:

(a)  Mr Gao had acknowledged receiving (in New Zealand) a request by Mr Shu to bring G3 and G9 budwood to China (when he travelled there) and agreeing to do so [93].

(b)  Mr Gao (in performance of the promise made in New Zealand) then exported the G3 and G9 budwood from New Zealand and supplied it to Mr Shu. The False Licence Agreement and receipt were documentary testimony to exactly that effect [94].

(c)   Although there was documentary travel evidence of Mr Shu visiting New Zealand for a week in late April 2012, there was no sound basis available to infer he used that opportunity himself to smuggle G3 or G9 budwood out of New Zealand [95].

Issue Five: Did the Judge err in applying the PVR Act extraterritorially? [97]-[123]

  1. To the extent conferred by the PVR Act, rights were territorial, rather than extraterritorial. That is, the PVR Act applied to things done, and people in, New Zealand and not elsewhere; the PVR Act did not expressly or impliedly confer extraterritorial rights [108- 109].
  2. It was common ground the PVR Act had no extraterritorial effect and that the rights enforceable by Zespri were solely those enjoyed by Zespri in New Zealand [106]. Neither its express words nor necessary implication suggested the PVR Act had extraterritorial reach. Rather, its words and context compelled the opposite conclusion [111].
  1. Based on the legislative text and context [108], article 11 of the 1978 UPOV Convention [109], and the presumptive position at common law that a statute has territorial-only effect unless extraterritorial reach is provided for expressly or by necessary implication [110], the relevant rights conferred by s 17(1) concerned exclusive rights to do things in New Zealand only [107].

Poynter v Commerce Commission [2010] NZSC 38, [2010] 3 NZLR 300 applied.

  1. PVRs granted in a variety in one member state do not automatically give PVRs in that variety in another member state, or necessarily mean that PVRs will be granted in that variety upon an application in that member state. If a breeder wishes to protect PVRs in a foreign jurisdiction, an application in that jurisdiction with the benefit of rights of priority is the contemplated avenue [109].
  1. The first and second causes of action were pleaded on the basis that Mr Gao and Smiling Face breached Zespri’s PVR rights under the PVR Act by “offering to sell, selling and/or supplying reproductive material of those varieties … for commercial purposes”. Zespri’s closing submissions were that entry into the False Licence Agreement undermined Zespri’s exclusive right to sell G3 and G9 and to “authorise the propagation of the G3 and G9 varieties for the purposes of commercial production of kiwifruit”. It was that submission that produced the Judge’s conclusion that Mr Gao’s (and Smiling Face’s) actions in purporting to authorise Mr Shu to grow G3 and G9 in China constituted an infringement of Zespri’s rights under the PVR Act. That conclusion was incorrect because it did not follow that entry into the False Licence Agreement (in New Zealand), thereby purporting to authorise Mr Shu to grow G3 and G9 (in China), constituted an infringement of Zespri’s rights under the PVR Act [114].
  1. Under the False Licence Agreement, Smiling Face Limited assumed obligations for both the physical supply of “plant materials” (being G3 and G9 budwood) to Mr Shu in China, and for the purported transfer to Mr Shu of PVRs in those varieties, permanently and throughout China [115-116]. The former obligation, if operative, would have involved a sale of protected material in New Zealand, and therefore a breach of s 17(1)(a) of the PVR Act [115]. However, the latter obligation involved the purported authorisation of acts in China, including propagation. If the purported authorisation of propagation of these varieties occurred in New Zealand, it would fall within s 17(1)(c). But because it related to China, it did not [108][116].

Subafilms Ltd v MGM-Pathe Communications Co 24 F 3d 1088 (9th Cir 1994) (en banc) applied.

  1. The purported authorisation by the appellants of conduct in China therefore did not infringe Zespri’s New Zealand PVRs [120].
  1. However, the fact that some had an international dimension, including the objective of propagating G3 and G9 in China, did not mean the pleaded unlawful acts undertaken in New Zealand in breach of s 17(1)(a) were not actionable [121]. While the Judge erred in holding entry into the False Licence Agreement infringed the PVR Act, she did not err in her assessment of the territorial effect of the PVR Act. While execution of the False Licence Agreement was not a breach of s 17, the acts of offering to sell G3 and G9 budwood to Messrs Shu, Yu and Lu and the preparation of the G3 and G9 budwood for export were, because they occurred in New Zealand [123].

Issue Six: Did the Judge err in fixing damages? [124]-[145]

  1. The trial Judge did not err in principle in fixing damages [132], because:

(a)  Section 17(4) offers a broad suite of remedies comparable with those ordinarily available at common law in responding to economic torts (of which PVRs infringement is one). It may usefully be compared to the more unbundled ss 120–122 of the Copyright Act 1994. Account of profits, a restitutionary remedy, is mandated where PVRs infringement is innocent: s 17(8). But this conduct was not innocent and the appellants’ profit, if any, was unproven [133].

(b)  The remedy granted to Zespri — compensatory damages fixed by the user principle — lay within s 17(4) and is normal where there is an expropriation and use of intellectual property rights, and either the plaintiff’s loss or the defendant’s profit is elusive. The underlying rationale of the user principle was that damages should compensate the right-holder for the unilateral expropriation of the value inherent in the right to control exploitation. In requiring payment for the expropriated right, the remedy serves a compensatory function, essentially putting the plaintiff in the position they would have been in had the wrong — the expropriation and use — not been committed [134].

Watson, Laidlaw & Co Ltd v Pott, Cassels & Williamson 1914 SC (HL) 18 applied.

(c)   The user principle presumes a hypothetical negotiation between the parties. It assumes a degree of reason on both sides, and the wherewithal to pay on the part of the defendant.

General Tire & Rubber Co v Firestone Tyre & Rubber Co Ltd [1975] 1 WLR 819 (HL) considered; New Zealand National Party v Eight Mile Style, LLC [2018] NZCA 596) applied.

(d)  The Judge was correct to look for comparable evidence of licence fees for the propagation of G3 in New Zealand, as the infringements were of Zespri’s New Zealand PVRs. Excluding the False Licence Agreement from the range of actionable infringements did not make a material difference to the damages, because it was the sale of the protected budwood that caused loss, not the false grant of non-existent exploitation rights, nor the post-dated agreement to supply after the fact [136].

WesternGeco LLC v Ion Geophysical Corp 585 US _ (2018), 138 S Ct 2129 (2018) applied.

(e)  The Judge was entitled to rely on the competitive tender value in 2016 for G3 licences in New Zealand. That value, set at $171,000 per ha (GST-exclusive), represented a rational proxy for a hypothetically-negotiated sale [139].

Winchester International (NZ) Ltd v Cropmark Seeds Ltd, CA226/04, 5 December 2005 distinguished.

(f)    The Judge was correct in applying a 50 per cent discount to the damages assessed, not only because the acreages were not fully planted in G3 and G9 but more relevantly because of the expectation that Zespri could be expected to act on its rights, even if that required action to enforce different rights — that is, those PVRs held in China. The inexactitude in measurement of the four orchards was also accounted for by this discount [141].

New Zealand National Party v Eight Mile Style, LLC [2018] NZCA 596;  Uzinterimpex JSC v Standard Bank plc [2008] EWCA Civ 819 referred to;

(g)  The Judge did not err in relation to the assessment of damages for Mr Gao’s contractual breach of the 2013 and 2014 G3 Licence Agreements. However, this award of damages compensated part of the same loss compensated by damages awarded in the PVR claims and the awards were not cumulative [142].

The Judge erred in using a notional licence area of 174.2 ha (rather than 141.3 ha) which altered the damages awarded under the first and second causes of action only, against Mr Gao and Smiling Face.

Result

The damages award against Mr Gao on the first cause of action of NZD $14,894,100, was reduced to NZD $12,081,150.  Smiling Face was ordered to pay damages of NZD$12,081,150 in respect of the second cause of action. [144].

The Appeal was otherwise dismissed.