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 investigation, 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 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 that they had purchased in 2013.

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 [19].

The Judge made a number of key findings of fact as to the activities of Mr Gao and Smiling Face Limited.

(1)     Alleged Licence and Supply of G3 and G9 to Mr Shu in China

Based on the evidence presented, taken together with other circumstantial evidence, the Court was satisfied that [85]:

(a)      Mr Gao had agreed to provide G3 and G9 budwood to Mr Shu in August 2012;

(b)      Mr Gao, in accordance with that agreement, exported G3 and G9 budwood from New Zealand in August 2012 and provided it to Mr Shu in China;

(c)       Mr Gao (on behalf of Smiling Face) signed a False Licence Agreement and Receipt in October 2012;

(d)      The purpose of the False Licence Agreement and Receipt was to deceive prospective investors in Mr Shu’s orchard into believing that the G3 and G9 varieties being grown on that orchard were lawfully licensed.  Mr Gao was aware of this purpose at the time he signed the documents;

(e)      Mr Shu was clearly able to secure significant investment in the Xianning 1 Orchard and subsequently the Xianning 2 Orchard;

(f)        Mr Shu showed the False Licence Agreement to local authorities in China to prove that he was lawfully authorised to grow G3 and G9;

(g)      Mr Gao received some form of consideration for his provision of G3 and G9 budwood to Mr Shu in signing the False Licence Agreement and Receipt, but the precise quantum of that consideration is not known;

(h)      Following Mr Gao’s provision of G3 and G9 budwood to Mr Shu in August 2012, Mr Shu facilitated the planting of those varieties at four different orchards.  As at 2016 G3 and G9 were growing at all four of those orchards;

(i)        The land area of the relevant orchards planted with G3 and/or G9 was approximately 174 hectares.

(2)     Alleged Joint Venture with Mr Yu (through Liangshan Yi)

The Court was satisfied that the circumstantial evidence supported findings that [99]:

(a)      Mr Gao entered into a joint venture with Mr Yu in relation to the development of the Liangshan Yi Orchard/Demonstration Park;

(b)      Mr Gao invested funds in the joint venture, as envisaged in the (draft) Investment Agreement;

(c)       The “Psa-Resistant Overseas Variety” referred to in the Cooperation Agreement was G3;

(d)      Mr Gao’s role as “technology officer” was to supply G3 to the joint venture with the intention that it be subsequently produced, promoted and sold to third parties as Psa-resistant kiwifruit varieties.  Mr Gao was the only -party based overseas.  He had ready access to G3 through his work in New Zealand and had previously offered to sell and/or sold G3 to others in China; and

(e)      Mr Gao did provide G3 to the joint venture for planting on the Liangshan Yiorchard.

(3)     Alleged Joint Venture with Mr Yuan and offer to sell G3 to Mr Li

The Court’s key factual findings were [112] – [113] that Mr Gao, when he was in New Zealand, offered to sell G3 plants to Mr Li and an agreement was concluded for the sale of G3.  Mr Li, however, subsequently withdrew from the deal once he discovered that Mr Gao did not have authority to sell G3 material to him.  The court suspected that the two exclusive kiwifruit varieties Mr Gao agreed to supply to his joint venture with Mr Yuan were intended to be G3 and G9.  Further, an undisclosed orchard may well exist.  There was insufficient evidence, however, to prove these facts on the balance of probabilities.

(4)     Alleged Dealings with Jiashang Agriculture and Mr Yang

The evidence relating to this infringement grouping fell short of establishing on the balance of probabilities, that Mr Gao had exploited (or attempted to exploit) the G3 and/or G9 varieties through Jiashang Agriculture [118].

Extraterritoriality Issues

This case raised issues of territoriality as Mr Gao and Smiling Face were alleged to have engaged in infringing conduct that was cross border in nature - with some acts occurring in New Zealand and others when Mr Gao visited China [26].  The defendants submitted that Mr Gao’s New Zealand-based acts (such as purporting to authorise growing of G3 and G9 in China) could not constitute an infringement of Zespri’s New Zealand PVR rights because of the presumption against extraterritoriality of legislation. 

(A further issue for the court was whether Mr Gao’s acts or conduct in New Zealand had diminished Zespri’s enjoyment of its exclusive rights in the G3 and G9 varieties [119])

Held, granting an injunction and awarding damages

Extraterritorial Application

(1)      Any acts or conduct within New Zealand that diminished Zespri’s enjoyment of its exclusive rights[1] would be infringing even if the relevant act formed part of a chain of conduct, some of which occurred outside New Zealand.  Such liability arose as a result of Mr Gao’s conduct within New Zealand diminishing the value of the express exclusive rights conferred within New Zealand (which property rights were also recognised in overseas Convention countries, including China) [38].  A claim was not extraterritorial simply because it involved foreign acts or parties.  Coverage of acts that commenced or took place within the borders of the country whose law was applied was not “extraterritorial” in the sense that was relevant for the purposes of the presumption against extraterritorial application [39].  Recognising acts within New Zealand as potentially infringing, even when they formed part of a chain of actions that included cross border elements, accorded with a purposive interpretation of the PVR Act, viewed in its wider international context [41].

First Cause of Action: Did Mr Gao breach Zespri’s PVR rights?

(2)      Mr Gao’s conduct within New Zealand fell into two broad categories:

(a)     Acts relating to the sale (including offers to sell) and export of G3 and G9 to China; and

(b)     The signing of the False Licence Agreement and Receipt [120].

(3)      The chain of conduct relating to Mr Gao’s sale and export of G3 and G9 to China involved the following broad categories of conduct [123]:

(a)     An offer to sell (by Mr Gao in New Zealand);

(b)     An acceptance of that offer (by Messrs Shu, Yu and Li, respectively, in China);

(c)     In respect of the sales (to Messrs Shu and Yu only) preparing the G3 and G9 material for export to China, including growing and/or harvesting the relevant material, preparing it for transit, making and implementing shipping arrangements (or packing it for transit in Mr Gao’s luggage or carry on bag, if taken personally by him to China) and related acts (in New Zealand); and

(d)     Provision of the G3 and G9 material to Messrs Shu and Yu, in China.

(4)      The conduct set out in (a) and (c) above occurred in New Zealand.  The False Licence Agreement and associated Receipt were also signed by Mr Gao in New Zealand [124].

Could Mr Gao and Smiling Face Limited be concurrently liable for the same conduct?

(5)      Where liability was established in relation to particular conduct undertaken by Mr Gao on behalf of Smiling Face Limited then both were concurrently liable for those actions.

Winchester International (NZ) Limited v Cropmark Seeds Limited CA 226/04, 5 December 2005 at [56] applied.

Could export of a protected variety infringe PVR Rights?

(6)      Conduct taken within New Zealand to facilitate export of protected varieties could potentially diminish the right holder’s enjoyment of its exclusive rights [130].

Winchester International (NZ) Limited v Cropmark Seeds Limited CA 226/04, 5 December 2005 at [56] applied.

Could an offer to sell a protected variety infringe PVR Rights?

(7)      The PVR Act expressly defines ‘sale’ as including offers to sell.  Accordingly, Zespri was the only person or entity within New Zealand that had the right to offer to sell reproductive material of the G3 and/or G9 varieties, regardless of whether (or indeed where) an actual sale was subsequently concluded.  An offer to sell could be made to a person within New Zealand but could also be made (from New Zealand) to a person who is based overseas [132]. If Parliament had intended to restrict, the relevant exclusive right to complete sales only, it would not have included ‘offers to sell’ in the definition of ‘sale’ in the PVR Act [133].

What consequences flowed from Mr Gao’s relevant acts within New Zealand?

(8)      As a result of Mr Gao’s acts within New Zealand, the G3 and G9 varieties had been released into China in an uncontrolled manner.  As at 2016, G3 and G9 plants were growing commercially on four orchards associated with Mr Shu and one orchard associated with Mr Yu.  [134].  If Mr Gao had not taken various steps in New Zealand to harvest or otherwise obtain G3 and G9 reproductive material and then arrange for its export to China, those varieties would never have reached China [135].

(9)      The False Licence Agreement and associated Receipt were signed by Mr Gao on behalf of Smiling Face on the express understanding that they were to be relied on to assist in the commercialisation of G3 and G9 in China.  Mr Shu had subsequently relied on those New Zealand-originated documents to obtain funding and plant extensive orchards and market the kiwifruit grown there as G3 and G9.  Mr Shu had falsely represented to authorities in China that this conduct fell within the terms of those documents and had therefore been duly authorised. [136]

How had these consequences impacted Zespri?

(10)   There was harm not only to Zespri’s plans for China in building a sustainable production base for expansion but also its brand in China and globally.  (Inferior fruit marketed as G3 would tarnish the high-quality reputation and lower prices for illegitimate fruit might affect future price expectations).  There was also a clear risk that unauthorised growers might illegitimately compete with Zespri in the future to supply other overseas markets with Zespri’s own proprietary varieties [141] – [142].

(11)   The Court was satisfied that Zespri had proved that Mr Gao’s actions within New Zealand in relation to its G3 and G9 varieties had had the effect of diminishing its enjoyment of its exclusive rights in those varieties and that the cause of action had been proved.

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

(12)   The second cause of action had been proved [147].  Mr Gao signed the False Licence Agreement and Receipt in New Zealand in October 2012, as agent for Smiling Face.

(13)   In relation to infringement grouping 2, Smiling Face was the relevant party to the Liangshang Yi joint venture and any actions taken by Mr Gao (in New Zealand) to implement that joint venture and perform his obligations under it (including the export of G3 and G9 to China) were equally attributable to Smiling Face, as the relevant party to that joint venture. [146]. 

What damages were appropriate for the breach of the PVR Act by Mr Gao and Smiling Face?

(14)   Once infringing conduct within the New Zealand jurisdiction was proved, then the plaintiff was entitled to full compensatory damages for it.  Zespri was therefore entitled to recover damages flowing from exploitation abroad of the domestic acts of infringement committed by Mr Gao and Smiling Face [150] – [152].

New Zealand National Party v Eight Mile Style LLC [2019] 2 NZLR 352 CA; WesternGecko LLC v Ion Geophysical Corp 138 S Ct 2129 (2018); Los Angeles News Service v Reuters Television International Limited 149 F 3d 987 (9^th Cir 1998) referred to.

What approach should be taken to quantifying damages?

(15)   Applying s 17(4) of the PVR Act, it was appropriate in this case to focus on Zespri’s losses, rather than Mr Gao’s gain, when assessing damages.  [154].  As for the flagrancy of the infringing conduct (s 17(4)(c)), the court was satisfied that this was premediated, calculated and flagrant [155].

(16)   The court was satisfied that the user principle was the appropriate method by which to assess damages in this case.  These principles, however, must be applied in the context that s 17(4) of the PVR Act required the court, when assessing damages, to take into account not only any loss suffered by the rights holders, but also any loss likely to be suffered by them.  Accordingly, any notional licence fee must take that into account [160].

New Zealand National Party v Eight Mile Style LLC [2019] 2 NZLR 352 CA applied; Morris-Garner v One Step (Support) Limited [2018] UKSC 20 referred to.

(17)   It was appropriate to use Zespri’s 2016 New Zealand G3 licence fee as the starting point for assessing damages on a user principle basis [165].  The total land area of the five orchards on which Zespri had proven that G3 and G9 was now growing totalled 174.2 hectares.  Applying a notional fee of $171,000 per hectare to 174.2 hectares would result in a damages figure of $29,788,200.  It was appropriate to reduce the initial damages figure by 50% to take into account that only a portion of each orchard was planted in G3 (or G9) and (more significantly) that Zespri could reasonably be expected to take legal action in China to protect its PVR rights in G3 in that country and attempt to mitigate its future losses.  Accordingly, the appropriate damages figure for the first and second causes of action was $14,894,100 [170] – [171].

Third cause of Action: Alleged breach of G3 Licence Agreements

(18)   The reporting clause in the G3 licences entered into between Mr Gao and Ms Xue with Zespri required them to report any infringements that they were aware of immediately on signing the first licence agreement on 31 July 2013. They were then required to report any new infringements as soon as they became aware of them and to give Zespri all reasonable assistance in dealing with the relevant infringements [175].  Given that the obligations were contractual rather than statutory, no issues of extraterritorial application arose.  The obligations were not limited to conduct occurring in New Zealand [176]. 

(19)   Mr Gao breached the agreement on signing because he had provided G3 to Mr Shu the previous year. Mr Gao had an obligation to immediately report those matters to Zespri on signing the first licence agreement [177]. In addition, the following conduct or events after 30 July 2013 breached one or more of the licence conditions [178]:

(a)     The ongoing knowledge acquired by Mr Gao of Mr Shu’s activities in relation to G3 in China, as a result of the ongoing business relationship between the two men;

(b)     Mr Gao entering into a joint venture with Mr Yu (the Liangshan Yi joint venture) with the aim of working together to exploit G3 (and G9) in China;

(c)     Mr Gao’s agreement in November 2015 to provide G3 budwood to Mr Li;

(20)   Ms Xue was jointly liable under the G3 licence agreements for Mr Gao’s breach of the reporting clause, despite the fact that Zespri did not allege any specific wrongdoing on her part.  Every partner in a partnership is jointly liable with the other partners for all obligations that the partnership incurred while he or she is a partner [180].

(21)   Mr Gao’s breaches of the licence agreement contributed to the harm that Zespri had suffered, albeit to a lesser extent than the PVR Act infringements.  This was because by the time of the first contractual breach on 30 July 2013, the G3 variety had already been established on three orchards in China [183]. 

The appropriate measure of damages

(22)   The user principle has been recognised as an appropriate contractual measure of loss when the defendant has wrongfully used intellectual property rights in a contractual context.  The breaches in this case fell squarely within the recognised category of wrongful use of intellectual property rights and the court was satisfied that the “user principle” was the appropriate measure of damages under the contractual cause of action [185] – [186].

Morris-Garner v One Step (Support) Limited [2018] UKSC 20 applied.

(23)   The quantification of damages involved multiplying the relevant land area of 126.6 hectares by a notional licence fee of $171,000 per hectare which resulted in a figure of $21,658,600.  That figure should be discounted by 50% to take into account that only a portion of each orchard was planted in G3 (or G9) and (more significantly) that Zespri could reasonably be expected to take action in China to attempt to mitigate its future losses.  This resulted in a damages figure of $10,824,300 [187].

Relief

(24)   Zespri was granted a permanent injunction against Mr Gao, Ms Xue and Smiling Face restraining them from further infringing or procuring any further infringements of Zespri’s PVR rights in the G3 and G9 varieties [202].

 

[1]          Judgment [37]:

(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 the commercial production of kiwifruit; and

(c)        To authorise any other person or persons to do any of those things.