Alaska Airlines contractually obliged to pay Virgin for right to use VIRGIN

12th April 2023

• Virgin entered into a contract with Alaska Airlines, giving it a licence to use the Virgin trade marks and name
• Alaska Airlines rebranded and ceased all use of the Virgin brand, so stopped paying royalties and making any payment to Virgin
• The High Court held that the contract should be interpreted as requiring Alaska Airlines to continue to pay Virgin, whether or not it uses the Virgin brand

On 16 February 2023 the High Court issued its decision in Virgin Aviation TM Ltd v Alaska Airlines Inc
([2023] EWHC 322(Comm)).

Background

Licence agreement

The claimants, Virgin Aviation TM Limited and Virgin Enterprises Limited (‘Virgin’), entered into a contract with the defendant, Alaska Airlines Inc (formerly Virgin America Inc) (‘Alaska’), on 19 November 2014. The contract licensed certain trade mark rights to Alaska and the use of the Virgin name (together, the ‘Virgin brand’).

Under the contract, there were two key clauses:

1. Clause 3.6, which stated that Alaska would use the Virgin brand for as long as it provided the licensed activities (broadly, this encompassed the operation of an airline in the United States, Canada, Mexico and the Caribbean, and associated activities).
2. Clause 8.1, which set out that Alaska would pay Virgin either an annual royalty based on gross sales, or a minimum royalty, depending on which was greater. The minimum royalty was defined in the agreement.

Clause 8.1 of the agreement was amended several times, with the final wording providing that Alaska were to pay a minimum royalty to Virgin based on 0.7% of 80% of the 2013 revenues of Alaska (formerly Virgin America) for 25 years (up to 2039). The amount payable by Alaska would be adjusted for inflation.

Change in ownership

In December 2016 Virgin was acquired by Alaska Air Group Inc following a change of ownership and an initial public offering on NASDAQ.

In March 2017 Alaska announced that it would be winding down use of the Virgin brand. Flights continued to operate under the Virgin brand until April 2018, and then Alaska began to use only Alaska branding. This included use on the Virgin website (which was updated to redirect to Alaska’s website) and on the aircraft themselves.

Dispute

Alaska stopped paying royalties to Virgin at the same time as it stopped using the Virgin brand, making the last payment in July 2019. Virgin argued that the express wording of the licence agreement stated that Alaska would have to pay at least the minimum royalty rate to Virgin, regardless of whether it was using the Virgin brand.

Alaska claimed that it was only obligated to pay royalties if it used the Virgin brand on its aircraft. Consequently, as it was not using the Virgin brand at all, it should not be obliged to pay any royalty fee.

Issues before the court

The case went to the High Court, where Christopher Hancock KC (sitting as a High Court judge) considered the following three issues:

• Whether Alaska was obliged to pay the minimum royalty even though it did not use the Virgin brand;
• Whether the royalty obligations could be modified pro rata to account for the fact that Alaska had stopped using the Virgin
• brand halfway through the year; and
• Whether it was a breach of contract if Alaska stopped all use of the VIRGIN names or trade marks.

Decision

1. Alaska’s requirement to pay the minimum royalty

The judge concluded that the wording of the agreement stated clearly that the parties agreed that Alaska should pay a continuing minimum fee, even if it stopped using the Virgin brand. This is because the fee was a flat fee payable for Alaska’s right to use VIRGIN, whether or not that right was taken up or not.

2. Pro rata royalty payments

In view of the judge’s conclusion on (1) above, this issue was largely irrelevant, because the royalty payment was a flat fee. However, the judge considered that, even if the requirement to pay Virgin ceased when Alaska stopped using the branding, the minimum royalty would still need to be paid in full for any year in which some use of the Virgin Brand was made (ie, where Alaska was winding down the use of the branding).

3. Breach of contract

The judge concluded that, although this issue was also largely irrelevant given his judgment on (1) above, it was true that Alaska was obliged to use the Virgin Brand at least to some extent under Clause 3.6. He stated that, in ceasing to do so, it had committed a breach of contract, and that the damages payable for this breach of contract was the amount of the minimum royalty.

Comment

This case shows the importance of ensuring that IP licensing agreements are clearly drafted, including providing express clauses for potential situations in which the trade marks and other relevant intellectual property cease to be used. Whilst this case turns on its facts, it also serves as a reminder of the importance of obtaining legal advice when negotiating minimum rates and extended terms in IP agreements, to avoid issues later down the line.

Alaska has reportedly said that it plans to appeal the decision.

This article first appeared in WTR Daily, part of World Trademark Review, in March 2023. For further information, please go to www.worldtrademarkreview.com.