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High stakes in big kiwifruit smuggling case

New Zealand kiwifruit is generating huge sales in the China market. For Zespri's exports alone, the market is currently at $504 million.

One of New Zealand's biggest exporters, Zespri, wants payback for someone smuggling New Zealand-invented kiwifruit plants to one of the world's biggest markets, China, and allowing them to be produced commercially.

In a $30 million High Court action, it has targeted two individuals and a company which it claims spirited the gold kiwifruit plants, or grafts of buds of the plants, to a Chinese grower who has used them in four orchards covering 167 hectares - and has the potential to sell the plants across China, cutting into future Zespri sales opportunities.

Following the Evidence Trail

The identities of Zespri's targets are still suppressed but the extent of Zespri's hunt for a culprit after learning of the big breach in early 2016 became clear at the court yesterday.

It involved 'private eyes' from Hong Kong on the trail in China, airport security and Ministry of Primary Industries checks of one defendant returning to New Zealand, a police search warrant and then Zespri obtaining information from police by using the Official Information Act, discovery through the court action of defendants' bank account records and searches of one's activities on Chinese social media site WeChat.

Zespri staff in China heard a rumour someone was growing the G3 and G9 strains of gold kiwifruit, a New Zealand invention, and alerted head office. Within months, the company's investigators visited four different orchards in different parts of China, speaking to Communist Party local secretaries and eventually to the man who ran the operations.

He allegedly told them he had a legitimate contract with a New Zealand supplier to grow and sell not only the G3 and G9 fruit but also to distribute the plants that are a potential ongoing goldmine for Zespri. He said he would show them the written contract, supposedly valued at 10 million Chinese renminbi, but only if they agreed to buy kiwifruit from him, and thus legitimise his ability to sell the gold fruit. Zespri investigators later did so, taking 50 cartons of the fruit back to a storage facility in Shanghai.

The court heard the man told Zespri he dealt with a man called "Geoff" who freighted him the buds for the plants by ship.

Zespri obtained fruit and leaf samples at each of the orchards and had them tested to prove they were its G3 and G9 offspring.

The New Zealanders worked out the grower number of a New Zealand based Zespri licensee from a picture he posted on a WeChat group, trying to prove his credentials for growing the gold kiwifruit and offering "disease-free seedlings" - words alleged to mean the G3 plants which are resistant to the PSA disease.

After alerting the Ministry of Primary Industries and police, the man was stopped on his return from a trip to China and a search warrant obtained for his rural business and premises. It was alleged in court by a Zespri manager, that an "unknown brown powdery substance" was found with plant grafting tools in the man's possession.

Zespri filed a criminal complaint with police in Tauranga but no charge was eventually brought against the two individuals and company now defending the civil case. The action asks Justice Sarah Katz for an injunction and award of damages of around $30 million for infringements of its intellectual property rights under the Plant Varieties Rights Act.

The Zespri lawyer, Laura O'Gorman, said the New Zealand-based man had purported to grant his Chinese purchaser a licence to the G3 and G9 kiwifruit varieties "for the entirety of China. The written contract licenses [the China-based grower] for any time in the future to plant G3 and G9 anywhere in China.

"What has been planted so far is not necessarily the end of the consequences for Zespri."  

China's Kiwifruit Market is Growing Rapidly

( Zespri's annual report shows China overtook Japan this year as Zespri's highest value export market, at $504 million. )

O'Gorman said the calculation of the $30 million in damages used  the 2016 price for gold kiwifruit multiplied by the number of producing hectares at the China orchards. "The calculations in the claim are relatively conservative."

Zespri's head of grower services, Tracy McCarthy told the court...

China [is] "extremely significant in Zespri's own growth plans". 

One of the defendants had travelled to China and would not explain to Zespri what he had been doing regarding Kiwifruit or be interviewed by police.

Cross examined by the defendants' lawyer, Eugene St John, McCarthy agreed new varieties of kiwifruit were being developed around the world and that yellow-flesh varieties were not unique to Zespri. She accepted it was not unusual that one of the defendants might be involved in an orchard in China.

The Investigation Continues

St John said the China-based grower running the orchards in question had travelled to New Zealand in the past, as had employees of an organisation with which he was involved and he put it to McCarthy that a number of people could have been involved in smuggling of the G3 and G9 plants. "It could be," she answered.

His client would say money paid to entities in China were loans, that a payment back from one person was reimbursement for an airfare and there was no evidence in WeChat communications that any joint venture company had been agreed. 

"[He] will give evidence to say in the chat history that he only ever discussed providing techniques that he had learned from New Zealand and there were never any discussions about him providing any New Zealand variety to China."

Zespri's global production manager, Shane Max, said in evidence the NZ grower number posted on WeChat in China belonged to the two defendants. He said one had deleted his WeChat history after his phone was given back to him by the police but Zespri had located the photo.

When the China-based grower had been questioned at his orchards, he confirmed he had planted G3 and G9 kiwifruit and believed they would sell for double the price in China than existing gold fruit. The biggest facility, in Wuhan, was around 120 hectares, with many of the vines under glasshouses.

"He said he had a licensing contract and paid 10 million renminbi and he could sub-license the rights under that contract."

Zespri had considered reaching a commercial resolution with the man but concluded he offered nothing special and 

"...considered himself more capable and knowledgeable than he was".
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