Kiwifruit smuggler ordered to pay Zespri $15m

A "surreptitious" conspiracy to introduce special New Zealand gold kiwifruit plants into China could cost a Chinese-born local grower $15m for breaches of intellectual property laws

Zespri has won a major court battle against an Opotiki kiwifruit grower it accuses of smuggling cuttings of its prized 'gold' variety to China and helping establish large scale orchards of the valued fruit.

The breach of the New Zealand industry's kiwifruit intellectual property was alleged to have put possibly billions of dollars of future exports at risk and threaten the livelihoods of 2800 orchardists.

The High Court has ordered Haoyu Gao to pay the kiwifruit exporter and marketer almost $15m for taking the cuttings to China after signing a supposed licensing agreement with a grower there.

Zespri claimed Gao signed the document agreeing to supply the gold kiwifruit to a Chinese grower -  and that was an infringement of Zespri's rights under the Plant Varieties Rights Act.

It alleged a series of trips to China and visits to orchards by Gao - plus grafting tools and an unknown powdery brown substance found on him at Auckland airport - and social media chat group communications built a strong case he followed through on his signing of the supply agreement.

Zespri engaged private investigators in China to track down the five orchards which planted its varieties and senior staff travelled to China to confirm the findings. Police then searched Gao's home and computers for evidence of the smuggling.

Gao had claimed he signed the 2012 so-called False Licensing Agreement supplied to him from his chat group associate from China, Changqing Shu, but got cold feet and did not actually take any of the gold kiwifruit varieties with him when he went to China.

But Justice Sarah Katz, who took 15 months to issue her judgment after a November 2018 hearing, found for Zespri on all three of the counts it brought against Gao, his wife Xia Xue and their company Smiling Face Ltd. She found Gao to be a "very unimpressive witness," who "revealed himself to be a person who lacks a moral compass and does not place a high value on honesty".

"Mr Gao’s evidence was often evasive and implausible.  At times he contradicted both his own previous evidence and contemporaneous documents."

She backed Zespri despite accepting Gao's legal team's view that evidence introduced by Zespri of DNA testing to prove the Chinese orchards are growing the G3 or G9 kiwifruit variety was inadmissible hearsay as the scientists who conducted the testing did not testify directly.

The judgment could yet be appealed. Zespri, however, says it will now proceed with action in China under that country's legal protections for intellectual property and has left its options open on pursuing Gao and his co-conspirators who introduced the gold kiwifruit varieties there.

Justice Katz rejected an argument from Gao's lawyer Eugene St John that there were no losses to Zespri in New Zealand and therefore no damages under New Zealand law - that any losses would apply only in China, and under a different jurisdiction. She found the intention of the Plant Varieties Rights Act and international agreements was to allow damages to be considered across borders.

On Gao's claim not to have taken the budwood to China, she said: "I reject Mr Gao’s evidence that he reneged on his promise to provide G3 and G9 budwood to Mr Shu. Mr Shu (then a senior figure in the Hubei kiwifruit industry) likely sought out Mr Gao for the specific purpose of obtaining G3 and/or G9 from him. The fact that Mr Shu reimbursed Mr Gao’s airfare, shortly after his arrival in China, is consistent with Mr Gao having done what was asked of him, as is the subsequent ongoing business relationship between the two men."

"As for the flagrancy of the infringing conduct, I am satisfied that it was premeditated, calculated and flagrant."  

She rejected his claim not to have known he breached his own gold kiwifruit licensing agreement with Zespri for his Opotiki orchard. "It is not credible that someone closely involved in the kiwifruit industry at that time (or possibly any time) could have genuinely believed that they were lawfully entitled to sell or export G3 and G9 to China."

In assessing damages for the breaches of the Plant Varieties Rights Act, the judge worked off Zespri's calculations of its New Zealand licensing fee of $171,000 per hectare, applied it to the alleged 174 hectares involved in China and then halved that sum as there is doubt about how much of the Chinese operations are actually the stolen G3 or G9 varieties, coming to $14,894,100. For their breaches of the licensing agreement, she awarded $10,824,300.

Zespri accounts for around 30 per cent of global kiwifruit sales. In 2015, kiwifruit was New Zealand’s second largest horticultural export after wine, earning export receipts of $1.2 billion. 

Its Chief Grower and Alliances Officer Dave Courtney said after the judgment was released: "This is an important decision for New Zealand’s kiwifruit growers, as well as for other New Zealand horticultural businesses, giving them the confidence that if they continue to invest in research and development to create value for New Zealand they will have protections against those who seek to undermine that.

“Gao’s actions, along with those of his associates, put at risk the livelihoods of New Zealand’s 2,800 growers, directly contributing to the unauthorised spread of Zespri’s SunGold Kiwifruit in China which has the potential to cost New Zealand communities significantly."

Courtney said "late last year, Zespri announced it would take legal action under Chinese plant variety rights legislation, and the successful outcome in New Zealand reinforces Zespri’s commitment to pursue all parties involved in or supporting the unauthorised spread of our varieties.”

Mr Courtney says the Chinese Government has strong Plant Variety Right legislation which it is in the process of strengthening further, alongside enforcement provisions.

“We’re very encouraged by that, as well as by China’s broader commitment and efforts to clamp down on other types of intellectual property infringement in China and we hope to work alongside Chinese officials to strengthen the protections of investors and IP holders further.

“A critical aspect of the [High] Court’s decision was the recognition of the multi-lateral standards of protection that are afforded all International Union for the Protection of New Varieties of Plants (UPOV) members. That framework was an important part of the Court’s ability to find for Zespri, despite some aspects of the infringing activity occurring cross-border or in another country."

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