Virgin Aviation TM Limited & Anor v Alaska Airlines Inc

This appeal gives rise to a straightforward issue of contractual interpretation. A trademark licencing agreement dated 19 November 2014 (“the Licence”) provided that, notwithstanding any other provision of the Licence, Alaska (the licensee), might elect to perform the licensed activities without payment of royalties to Virgin (the licensor), so long as Alaska did not use the licensed trade marks whilst so doing. The issue is whether that provision overrides Alaska’s obligation under the Licence to pay a specified “Minimum Royalty” for each financial year of the Licence.

On 24 March 2023 Christopher Hancock KC, sitting as a deputy High Court judge (“the Judge”), for reasons set out in a reserved judgment handed down on 16 February 2023, made an order declaring that Alaska must pay Virgin at least the Minimum Royalty each financial year, even where Alaska derives no Gross Sales from the use of the trademarks. Alaska appeals that decision with permission granted by Males LJ.

For the reasons set out below, I consider that the judge’s interpretation of the Licence was correct and would dismiss the appeal. If I am right in that conclusion, it is unnecessary to decide two further issues, mentioned briefly below, which would arise only if the Judge was wrong on the primary question.

On 20 July 2018 Virgin America Inc (“Virgin America”), an operator of an airline incorporated in the USA (but partly owned by companies in the Virgin group), merged with Alaska, also an American operator of what had been a competitor airline. Virgin America ceased to exist on that date and all its rights and obligations were assumed by Alaska.

Alaska thereby became party to the Licence, an agreement pursuant to which Virgin had granted Virgin America the exclusive use of certain Virgin names and trade marks (“the Names” and “the Marks”, together “the Virgin Brand”) for use by Virgin America in its airline operation. In exchange for those rights, Virgin America was to make royalty payments, with a Minimum Royalty initially set at US$7,978,200 but increasing in line with a price index during the 25 year term of the Licence.

By 30 May 2019 Alaska had completed the process of “de-branding”, ceasing altogether to use the Virgin Brand in its airline operation. From 16 July 2019 Alaska made no further payments to Virgin, claiming that clause 3.7 (set out below) of the Licence justified that position, notwithstanding that the Licence had a further 20 years left to run.

The Judge summarised the relevant terms of the Licence at [76] as follows:

It is important to note that clause 3.1 also granted Alaska the right, subject to clause 3.7, to carry on the Licensed Activities only under the Names, including Virgin America and Virgin America Airways.

Further, clause 3.7 of the Licence continued with an important proviso in the following terms:

Pursuant to clause 11.1, the Initial Term of the Licence was 25 years from 14 November 2014, the date of an Initial Public Offering of Virgin America shares. Thereafter the Licence was to be extended for further periods of 10 years unless terminated by either party giving not less than 3 months’ written prior notice.

It should also be noted (as it featured heavily in Alaska’s arguments) that the recitals to the Licence record that companies in the Virgin group had entered into previous trade mark licence agreements with Virgin Atlantic in 2005 and 2007 (with a revision in 2013), and that “this Licence amends and restates the Existing Licence in respect of the rights granted to [Alaska] by [Virgin]..” Relevant aspects of those earlier licence agreements are referred to below.

Although both parties’ primary position (at least on the appeal) was that the Licence could be interpreted simply by reading the words of the document, a considerable amount of documentary, oral and even expert evidence was adduced at the trial. That evidence related to events surrounding the formation and terms of earlier versions of the Licence and the involvement of the US Department of Transportation (“the DOT”) in considering and approving the terms of those versions and, indeed, of the Licence. Certification by the DOT was a pre-condition of operating a domestic airline in the US. The judge considered that evidence in detail in paragraphs [3] to [50] of his judgment.

In my judgment, the pertinent aspect of that background can be summarised as follows:

In his lengthy and detailed judgment, the Judge considered the background to the Licence, including the witness evidence and expert evidence. At [160(3)] he concluded that it was clear that the DOT, after considering the Licence, understood that it provided for a Minimum Royalty. On the basis that the correspondence with the DOT therefore did not “really assist” in relation to the proper construction of the Licence, the Judge stated that “I must simply construe [the Licence] by reference to the words used by the parties”.

The Judge’s reasoning as to the proper interpretation of the Licence was contained in the following sub-paragraphs of [161]:

The Judge did not deal expressly with clause 3.7 of the Licence and its alleged inconsistency with clause 8 in reaching his conclusion, but it is implicit in his reasoning that he considered that the phrase “without the payment of royalties” did not absolve Alaska of the obligation to pay the Minimum Royalty.

The Judge drew support from the factual matrix, and rejected Alaska’s contentions in that regard, in the further sub-paragraphs of [161] as follows:

The Judge added the following further points at [162]:

Virgin had also argued that, even if Alaska was right on the primary issue of interpretation, (i) Virgin was entitled to the Minimum Royalty for the whole of the last financial year in which Alaska used the Names and the Marks, not only the part of that year in which they were used; and (ii) Alaska was in breach of its obligation under clause 3.6 to make some use of the Names and Marks, and was therefore liable to Virgin for damages in the amount of the Minimum Royalty. The Judge noted at [163] that it was not strictly necessary for him to deal with those issues, but he nevertheless determined both in favour of Virgin. Alaska challenged both of those findings on this appeal, but as indicted above, those challenges do not require determination if I am right that the Judge should be upheld on the primary issue of interpretation.

It was common ground that the process of contractual interpretation is a unitary exercise involving an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences: see Lord Clarke JSC in Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 at [21] and Lord Hodge in Wood v Capita [2017] AC 1173 at [11]. Lord Hodge went on to say in that paragraph that:

Alaska, in particular, emphasised the dictum of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 at 1385H, referred to in both Arnold v Britton [2015] AC 1619 and Wood v Capita, holding that while evidence of the parties’ intentions or their negotiations was inadmissible, “…evidence of the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction” was admissible.

In that context, Alaska contended that its interpretation of the Licence, that the Minimum Royalty was not payable if Alaska made no use at all of the Names or Marks, was supported by the language of clause 3.7, the admissible factual matrix and considerations of commercial sense.

As for the language, Alaska emphasised that clause 3.7 expressly provides that it is entitled to operate without using the Virgin Brand and to do so without paying royalties in respect of such operation. The suggestion that Alaska should nonetheless have to pay a sum by way of a Minimum Royalty despite none being payable for actual usage, is inconsistent with Alaska’s express entitlement. Such inconsistency is readily resolved in favour of Alaska’s entitlement to operate free of royalties by virtue of not just one but two phrases giving primacy to that entitlement, namely: “Notwithstanding any other provision of this Licence...” and “…nothing in this Licence shall prohibit”. It follows, submitted Alaska, that as a simple matter of the language used, where Alaska does not use the Name or Marks at all, the Minimum Royalty is not payable. Alaska recognised that its reading rendered clause 3.6 surplusage, because on its case it was entitled to cease using the Virgin Brand completely, in direct conflict with that clause. But Alaska submitted that was not a powerful objection given the clear opening words of clause 3.7, inserted in the 2007 TMLA with the express purpose of qualifying the effect of clause 3.6 which had troubled the DOT.

That reading of the Licence is supported, Alaska argued, by the factual matrix formed by the regulatory background, well known and understood by the parties to the Licence. That resulted in the inclusion of clause 3.7 in the 2007 TMLA, itself referenced in the recital to the Licence. The DOT required that Virgin America should be entitled to operate free of the control of the Virgin group, including being able to operate without using the Virgin brand on a royalty-free basis. That requirement would be undermined, Alaska contended, if, in operating without using the Virgin brand, it had to pay the equivalent of 80% of the royalties (as of 2013) which would have been payable if it had used the brand.

As for commercial considerations, Alaska pointed to the fact that the possibility of a de-brand was firmly in mind when the Licence was executed, such that it would not have made commercial sense for Virgin America (now Alaska) to agree to pay a substantial sum to Virgin for rights it might not use for a significant part of the term of the Licence. On the other side of the equation, Virgin’s position in the event of a de-brand (or material decrease in the use of the Virgin Brand) was recognised and protected by its option to terminate the Licence in that event, enabling it to re-license the Virgin Brand to a third party.

In my judgment there is no merit in any of the above contentions: the language of the Licence, the factual matrix and commercial considerations all point firmly to Virgin being entitled to at least the Minimum Royalty in exchange for the rights Alaska holds for the remainder of the term of the Licence.

It is appropriate to start with and accord particular weight to the language of the Licence given that it is a professionally drawn contract between commercial parties. That is all the more so in circumstances where the parties knew and intended (i) that its terms would be reviewed and had to satisfy a regulator and (ii) a third party might well acquire or merge with Virgin America and assume its rights and obligations under the Licence.

In my judgment Alaska’s approach to the wording of the Licence was misconceived, taking clause 3.7 as a starting point and seeking to rely upon its introductory words as rendering clause 3.6 surplusage and clauses 8.1 and 8.6 (providing for payment of the Minimum Royalty) inapplicable. The correct approach, at least in the first instance, is to seek to read all provisions of the Licence together, so as to understand the overall meaning and effect of the contract. Words giving primacy to one provision must of course be given effect where appropriate, but only to the extent that there would be an inconsistency or conflict between that provision and another.

Read in context, clause 3.7 entitles Alaska to conduct some (or indeed most) of its operations without using the Virgin Brand (derogating from the general requirement to use and promote the Virgin Brand in clause 3.6) and not to pay royalties on those operations. The quid pro quo is that Virgin has the option to terminate the Licence in the event that usage of the Virgin Brand and therefore royalties drop materially, using a 20% drop as a benchmark. It is clear (and Alaska does not assert the contrary) that the Minimum Royalty would continue to be paid even if usage of the Virgin Brand dropped to a minimal level.

What clause 3.7 does not provide is that Alaska can cease all usage of the Virgin Brand (thereby removing any meaning from clause 3.6) and at the same time avoid paying the Minimum Royalty or indeed any sum at all in respect of the rights it would continue to hold, if not use. Clause 3.7 can and should be understood consistently with the rest of the Licence, reading it as obliging Alaska to continue at least some usage of the Virgin Brand, or at any rate to pay the Minimum Royalty for its right to do so. Whilst deploying the word “royalty” in the definition, it is clear that the Minimum Royalty is not in fact a sum calculated by reference to actual usage (or a “royalty” at all) but a minimum payment Alaska must pay to Virgin for the Airline Rights granted under clause 3 of the Licence. The wording of clause 8.6 makes it plain that Alaska must pay the greater of the Minimum Royalty and the amount of actual royalties: that is entirely consistent with and encompasses the fact that actual royalties may not be payable at all due to the effect of clause 3.7.

The factual matrix, to the extent it is helpful at all, in my view supports rather than undermines the above reading. Clause 3.7 was introduced in the 2007 TMLA to permit Virgin America to operate without using the Virgin Brand and without paying royalties to that extent. At that point there was no Minimum Royalty provision, but one was introduced (and noted and approved by the DOT) in 2014 for inclusion in the Licence. Its inclusion at that point can only be read as providing protection for Virgin in circumstances where it was giving up its corporate control over Virgin America and in the context that it was therefore exposed to the risk of a complete de-brand. The parties plainly did not super-impose a minimum payment obligation in that context with the intention that it would be defeated by a complete de-brand, leaving Virgin with no recompense for licensing its rights.

The commercial considerations also strongly favour Virgin’s interpretation. There is a strong presumption that commercial parties do not intend to provide something for nothing, but Alaska’s contention is that it should be entitled to hold (and effectively “sterilise”) valuable intellectual property rights for up to 25 years, and yet pay nothing. If nothing else, it is plainly of value to Alaska that the well-known Virgin Brand should not be used by one of its competitors in the US airline marketplace. It is not appropriate to consider the adequacy or otherwise of that consideration, but it is plain that some payment would be expected and indeed required.

Alaska’s response is that Virgin is protected against the commercially absurd situation of receiving nothing for its rights by the inclusion in clause 3.7 of an option to terminate, enabling it to exploit its rights elsewhere. The immediate answer is that it was common ground that it would by no means be easy for Virgin to re-license the rights to a third party airline (and indeed actual attempts to do so have not succeeded). But more fundamentally, if Alaska’s interpretation were right, Virgin would have no choice but to terminate upon de-branding, effectively inverting the option by providing Alaska with the right to end the Licence at any time with no penalty, despite its 25 year term and the recent addition of the new concept of a minimum annual payment. The Licence did not, of course, give Alaska an express option to terminate at any time, and it is difficult to see why Virgin would have agreed to enter the 25 year Licence on that basis or how Virgin America could have insisted on such a right. Further, if Alaska’s interpretation were right, it is unclear how Virgin could sensibly decide whether to exercise its option during a partial de-branding, not knowing whether at some unknown point Alaska might completely de-brand and cease to be obliged to pay anything. It makes far more commercial sense for the exercise of the option to be considered against the backdrop of the Minimum Royalty (matching the 80% threshold in the option) being payable in any event.

Yet further, as Mr Toledano KC pointed out on behalf of Virgin, Alaska’s interpretation entails that there would be a huge and unjustifiable difference between the use of a single Name or Mark in any part of Alaska’s operation (perhaps by mistake), which would trigger the Minimum Royalty payment of nearly US$8m, and a complete de-brand, where nothing would be payable. There is no commercial or rationale justification for such an arbitrary distinction with huge financial consequences, which cannot have been intended by the parties.

Whilst upholding the Judge’s decision, I would express some cautious concern that the trial of a straightforward issue of contractual interpretation took five Commercial Court days and involved such extensive evidence. Perhaps due to that process, the Judge delivered a 59 page judgment, which only identified the issues in paragraph 51 and the relevant contractual terms in paragraph 78. In the end the Judge’s analysis of the contract terms occupied just two sub-paragraphs in which he did not refer to the central provision, clause 3.7 of the Licence. I am sure that the case looked different at first instance, but would suggest that, in future, both judges and parties take care, in commercial cases, to focus intently on the contract and the detailed analysis of its terms.

I agree.

I also agree.