Virgin Aviation TM Limited & Anor v Alaska Airlines Inc

Clause 3.6 provided that: “The User undertakes that, for as long as it provides the Licensed Activities, it shall continue to do so using the Names and shall use all reasonable efforts to promote its conduct of the Licensed Activities under the Names.”

Under Clause 8.1, Virgin America agreed to pay to Virgin an annual royalty calculated as 0.5% of “Gross Sales”. Gross Sales were defined as “the total amount received by the User and/or its sublicensees and assignees in connection with the carrying on of the Licensed Activities…”. Thus, Gross Sales referred solely to revenues from the Licensed Activities, and did not distinguish between revenues attributable to use of the Virgin brand and other revenues.

The Licensed Activities were defined in Schedule 1 and, broadly, encompassed the operation of an airline in the US, Canada, Mexico and the Caribbean, and associated activities.

By way of summary:

“In determining actual control, the Department reviews the totality of the circumstances surrounding the relationship between the air carrier and the foreign entity or entities involved. No single factor dictates a finding of foreign or domestic control; rather, all factors are reviewed in combination to determine a foreign entity’s ability to influence the actions of an air carrier. We have thoroughly reviewed the record of this case and identified numerous relationships between the applicant and the Virgin Group. Based on our review of the totality of the circumstances and the various indicia of control, we tentatively find that Virgin America is under the actual control of the Virgin Group and Sir Richard Branson.”

The DOT analysed five specific control factors. The fourth factor was the 2005 TMLA. In this regard, the DOT stated:

“At the very heart of this matter is the contractual arrangement that will govern Virgin America’s commercial operations – its licensing agreement with the Virgin Group. There is no doubt from the undisputed record in this proceeding that Virgin America’s business plan rests entirely on its ability to implement this agreement, essentially importing the powerful Virgin trademark into the U.S. market. American, Continental, and Delta state that the License Agreement between Virgin America and the Virgin Group further supports their position that the Virgin Group controls the applicant. Delta further states that use of the Virgin brand itself is not a problem, instead pointing to “the fact that the brand and license are inextricably linked with Virgin’s principal foreign investor which has other influencing connections to the applicant.”

We tentatively agree.

According to the record, Virgin America entered into the License Agreement to conduct its proposed operations using the “Virgin” name and to build on the brand and add to “its well-recognized attributes of quality, service, value, and innovation.” However, our review of the License Agreement identified several conditions, detailed in the confidential record, that significantly restrict Virgin America’s commercial decision-making authority and essentially prevent Virgin America from acting as an independent air carrier. For example, Virgin America is limited to conducting operations exclusively within the United States, and between the United States and Canada, Mexico, and the Caribbean (collectively referred to as the “Territories”). This restriction takes away from the applicant – that is, absent the consent of a foreign citizen – the basic right to conduct international transportation. In addition, the applicant is only authorized to enter into code-sharing arrangements with Virgin Atlantic and to operate aircraft having more than 20 passenger seats and an operational ceiling of no more than 85,000 feet. Moreover, the License Agreement grants Virgin Atlantic the sole right to operate aircraft within the Territories on any routes that have at least three arrival/departure points, one of which is outside the Territories, and similarly to market and operate any code share routes that have at least three arrival/departure points in conjunction with another airline, provided that such route is marketed primarily as a route between a point between the Territories and a point within the United Kingdom, and the part of the route provided by the other airline links and feeds passengers to and/or from the part of the route operated by Virgin Atlantic or another “Virgin” named airline. Therefore based on the foregoing, we must tentatively find that this agreement, including its terms and conditions, represents another significant avenue of control for the Virgin Group over Virgin America’s proposed operations.

Although the terms of this license agreement thus play a major part in our tentative decision in this case, our tentative finding does not mean that U.S. air carriers may not enter into franchise or similar marketing arrangements with foreign carriers. We do not believe that U.S. citizenship law necessarily prevents a U.S. air carrier from licensing the trademark of a foreign carrier, as part of an arms-length franchising agreement or from sharing the revenues of the resulting operations with the licensor; we also recognize that a legitimate commercial agreement of this sort would inevitably involve some degree of influence by the licensor over the U.S. carrier’s operations. Any such arrangement, however, must be structured so as to preserve fully the independence of the U.S. carrier’s decision-making authority ─ and of its management ─ as well as preserve the air carrier’s ability to exist outside of the franchise. Such arrangements could pass muster if they avoid the appearance, and reality, of foreign control over the purported U.S. air carrier. Independent franchises are permissible; U.S. outlets of foreign air carriers are not under current law. What Virgin America has proposed in its application in this matter, which we must tentatively reject, appears to involve restrictions that make the applicant almost completely under the influence of a foreign citizen.”

Virgin America explained that:

“…the parties have now agreed to an amendment to the [2005 TMLA] to make it abundantly clear that the DOT’s new requirement – that the airline can exist outside the license or franchise agreement – will demonstrably be present.”

Virgin America went on to explain that the amended 2005 TMLA would give Virgin America the right to fly and code-share unfettered outside the designated territories (the US, Canada, Mexico and the Caribbean (the “Territories”)) without using the Virgin brand, so that Virgin America could fly and codeshare anywhere in the world, including in the Territories under any brand, and in the Territories under the Virgin brand.

Virgin America further stated as follows:

“In addition, the parties have agreed to amend and clarify the License by removing any restriction on Virgin America’s licensed activities if it does not use the “Virgin” trademark. Thus, Virgin America, as a licensor of the mark, will still be allowed to use the mark and fly as Virgin America in the Territories. It will still be allowed to fly internationally or code-share with any foreign or domestic air carrier and now additionally to operate within the Territories unfettered by the License, provided it does not use the Virgin mark, and with the amendment, the U.S. controlled Board may now decide to forgo the mark entirely and not be bound by any of the trademark agreement’s customary restrictions on licenses.”

In this context, Virgin America relied on evidence given by an economist, Professor Alan Shapiro, that “when compared to standard franchise agreements … this Licensing Agreement is uncommonly loose. Indeed, far from constituting control, the Licensing Agreement … particularly as amended, is quite liberal and permissive.”

The key amendment proposed to be made to the 2005 TMLA was that Virgin America proposed to add the following words as Clause 3.7:

“Notwithstanding any other provision of this License nothing in this License shall prohibit the User at any time during the Term from electing to perform the Licensed Activities without in any way using the Names or Marks so long as the User continues to pay the Royalties in full as and when due and on the basis set out in this License.”

Virgin America also explained that Virgin had given up a number of veto rights, but had retained the veto right “over … the company selling itself to a U.S. airline competitor”.

This order made a tentative finding that, contrary to the previous order to show cause, Virgin America was a US citizen.

The order set out the arguments of Virgin America and of the opponents of Virgin America’s application. The DOT’s decision in respect of the TMLA proposals was (in full) as follows:

“In Order 2006-12-23, the Department tentatively determined that the Virgin Trademark License Agreement (“License Agreement”) represented another potential avenue by which the Virgin Group could actually control the applicant. We cited several critical provisions allowing the Virgin Group effectively to dictate the scope and nature of the applicant’s operations and that went beyond what was necessary to protect the legitimate interest the former might have in protecting its brand equity, but as we observed in our show cause order, franchises do not inherently confer actual control of the air carrier on the franchisor. To comply with the law, any such arrangement must nevertheless be structured so as to preserve the independence of the U.S. carrier’s decision-making authority, as well as preserve the air carrier’s ability to exist outside the franchise.

In response to the Department’s concerns, Virgin America proposes to amend the License Agreement so as to expressly preserve Virgin America’s ability to operate “completely free of the Virgin brand and to freely code-share with any carrier domestically or internationally, anywhere and with any carrier,” with the exception that “Virgin Atlantic is the only U.K. based carrier it may code-share with under the Virgin brand and in those few markets in which Virgin Atlantic operates, it may only code-share with Virgin Atlantic.” In addition, the applicant proposed to revise Section 3.7 of the License Agreement to read as follows: “Notwithstanding any other provision of this License nothing in this License shall prohibit the User at any time during the Term from electing to perform the Licensed Activities without in any way using the Names or Marks, so long as the User continues to pay the Royalties in full as and when due and on the basis set out in this License.”

The Interested Parties characterize the changes to the License Agreement as inadequate, asserting that, under the agreement, the applicant’s code-sharing opportunities remain limited in both geography and choice of airline partners. ALPA notes that the agreement’s new provision allowing Virgin America “to perform the Licensed Activities” without using the Virgin brand is disqualified by other provisions that limit the scope of “Licensed Activities.” ALPA also argues that the obligation to pay royalties even on unbranded revenues creates a strong disincentive for the applicant to operate without the brand. American makes similar points, also arguing that the Virgin Group would retain significant oversight powers, regardless of whether an operation uses the brand.

Delta also describes an apparent conflict between sections 3.6 and 3.7 of the agreement, arguing that the former section obliges Virgin America to use the Virgin brand, with the latter purportedly freeing it from this obligation. Delta suggests that the freedom to operate without the brand is of limited value, and argues that Virgin America would effectively have to create a new and separate airline, in contrast to its fundamental proposal to operate under the Virgin brand. Delta also claims that the applicant would face regulatory constraints in mounting such an operation.

We have reviewed the changes proposed by the applicant in light of the arguments posed by the Interested Parties, and it appears that the Interested Parties’ arguments do have some merit. The draft agreement defines the Licensed Activities as including airline functions within the Mainland Territory and between that Territory and the Caribbean Territory, but then goes on to include “all activities... which would ordinarily be regarded as part of the business of an airline,” without geographic limitation. That provision apparently would permit the applicant to code-share within the Territories, but outside them only with Virgin Atlantic. It does not explicitly include the right to function “as an operating carrier outside the Territories.” Therefore, we propose to condition certification of the applicant on modification of the License Agreement so as to permit any operations (including code sharing)—even in direct competition with Virgin Atlantic—so long as the applicant does not use the “Virgin” name in those operations.

The geographic restrictions on Virgin America’s operations also appear to be overly broad. While it is reasonable to prevent the applicant from operating under the licensed Virgin name in markets that directly compete with Virgin Atlantic either with its own equipment or through code-share arrangements with competitors of the Virgin Group, the structure of the license and the restrictions on the applicant go further. It appears that the effect of the license is to limit the applicant’s operations in general, permitting it to operate independently only as an exception to the broad rule. Thus, we propose to condition certification of the applicant on a modification of the license such that the applicant’s operations are presumptively permitted, except in certain limited respects such as operations that use the Virgin mark. (In this regard, we do not find the 85,000- foot ceiling unduly onerous given the Virgin Group’s announced plans to mount a suborbital commercial service.)

We disagree with the Interested Parties’ that the applicant’s offer to include a new provision in the License Agreement that allows it the ability to operate independently of the “Virgin” brand is of illusory value. We believe that this provision does indeed constrain the Virgin Group’s ability to control the applicant and accordingly propose to require that the agreement be amended in this way as a condition to certification. However, we see no reason why the applicant’s operations outside of the license should still be subject to a royalty obligation to the Virgin Group. Payment of “royalties” on revenues not derived from use of the brand name would undermine the applicant’s independence; therefore, we propose to condition the applicant’s certificate on an amendment to the license that allows such activities to occur without royalty obligation.” (my emphasis).

noted that various of the changes being made would “strengthen the actual control of U.S. citizens”;

explained that the Virgin Group was modifying various veto rights in the company’s constitutional documents, including in particular as follows:

“The Virgin Group’s consent right related to mergers, consolidations, and sales involving a U.S. airline operator will also be revised so that the consent for an asset sale or similar transaction is required only if the assets comprise all or substantially all of Virgin America’s assets. […] The amendment or removal of these consent rights protects against the Virgin Group’s potential use of such rights to exert negative control over Virgin America and hinder the air carrier’s ability to operate independently;”

concluded that Virgin America would remain a US citizen after the various changes; and

stated:

“We also remind the air carrier that it continues to remain subject to the provisions of section 204.5 of the Department’s rules, which requires the company to advise us of any substantial changes in operations, ownership, or management. These changes would include, but are not limited to, any alteration to the ownership structure discussed above, any change in key management and technical personnel, or any other circumstances affecting foreign involvement in the structure or capitalization of the air carrier, including new governance provisions (such as supermajority voting rights). In addition, the air carrier must notify the Department of any exercise of warrants that would constitute a change in ownership. Lastly, we remind Virgin America of the requirement that the voting trust established during its initial proceeding must remain in place and can only be dissolved upon the Department’s written consent. Such changes may affect the Department’s fitness determination with respect to the air carrier’s citizenship.”

Prior to the meeting, Mr Huang emailed Mr Everitt as follows: “We're preparing for the meeting with DOT today, and we are planning on giving them a redline of the TM license as against the latest full version of the document. Can you send the Word version of the current TM license so that I can prepare a redline against the proposed version you sent yesterday?” Mr Everitt provided a copy of the 2007 TMLA, and a redline was produced which included the various changes, including the introduction of a minimum royalty.

Mr Huang requested 5 colour copies of the redline of the TMLA be printed for the DOT meeting.

A table was also produced which set out the reduction of the Virgin Group’s rights in respect of Virgin America as a result of the IPO. The table set out Virgin’s current rights, and indicated which would be lost through the IPO. In summary, after the IPO:

A presentation was also prepared for the DOT meeting. That document referred to modifications to the TMLA in summary. It also showed that Virgin’s voting stock was predicted to be 16.85% of the total and that its general equity interest was predicted to be 38.8% of the total. Prior to the IPO, the figures were c.24.9% and c.49.8% respectively.

Is Alaska obliged to pay the Minimum Royalty even if it does not use the names or marks?

If Alaska stops all use of the names or marks part way through the financial year, is the royalty obligation modified pro-rata in respect of that financial year?

If Alaska stops all use of the names or marks, is that a breach of Clause 3.6 of the Current TMLA?

Virgin sought over a number of years to re-use the Virgin brand in the context of the US airline industry. It pursued a number of avenues, and a series of obstacles and risks were identified. However, none of the avenues pursued proved successful.

Amongst the key reasons that the attempts proved unsuccessful was that Virgin was unable to raise US capital investment for the venture.

In MCC Proceeds Inc v. Bishopsgate Investment Trust [1999] C.L.C. 417 (CA) at §23, Evans LJ explained:

“the function of the expert witness on foreign law can be summarised as follows:

(1)

to inform the court of the relevant contents of the foreign law; identifying statutes or other legislation and explaining where necessary the foreign court's approach to their construction;

(2)

to identify judgments or other authorities, explaining what status they have as sources of the foreign law; and

(3)

where there is no authority directly in point, to assist the English judge in making a finding as to what the foreign court's ruling would be if the issue was to arise for decision there.”

How foreign law applies to the facts, including (for example) what on their proper construction particular orders made by a regulatory body mean, is a matter for the Court alone. MCC Proceeds implicitly recognises that the application of the law to the facts is not a matter for foreign law experts, and this was confirmed explicitly by the Federal Court of Australia in Noza Holdings Pty Ltd v. Commissioner of Taxation [2010] FCA 990, where at §13, Gordon J. said:

“An expert’s ability to give an opinion on foreign law is circumscribed. A distinction is drawn between the content of the foreign law and evidence about the application of the foreign law to the facts of the particular case: Neilson at [119] and Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 6) (1996) 64 FCR 79 at 82. The content of the foreign law is a question of fact about which expert evidence is receivable: Allstate at 82-83. However, once the “content” is ascertained, the application of that foreign law is a matter upon which evidence is not receivable: Neilson at [119]. The reference to “content” is a reference to identifying and expounding, in general terms, the scope, meaning and effect of relevant statutory and non-statutory foreign law: Allstate at 82-83.”

Alaska accordingly submitted that:

First, it was said, Dr Dempsey agreed that the aviation market was not a static one, but one intimately connected with fluctuations in both the global economy and national economies, as well as other factors which “create an enormous amount of volatility in [the aviation] industry”. Any analysis of the opportunities in the aviation market therefore had to look at the situation at the particular time the analysis is done, because the economic environment within the aviation industry will vacillate.

Dr Dempsey agreed that the analysis he had conducted in his report was to consider what options Virgin had if, after 25 July 2022, it terminated the Current TMLA and looked to re-use the Names or Marks. That was a forward looking analysis, although it drew on historical data.

Dr Dempsey made clear that he had not analysed the power or value of the Names or Marks in 2014 and had not analysed what a reasonable person would have thought in 2014 would be the ability to use the Names or Marks.

When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 , para 14. And it does so by focussing on the meaning of the relevant words, in this case Clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions. In this connection, see Prenn [1971] 1 WLR 1381 , 1384-1386; Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as HE Hansen-Tangen) [1976] 1 WLR 989 , 995-997, per Lord Wilberforce; Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 , para 8, per Lord Bingham of Cornhill; and the survey of more recent authorities in Rainy Sky [2011] 1 WLR 2900 , paras 21-30, per Lord Clarke of Stone-cum-Ebony JSC. 

For present purposes, I think it is important to emphasise seven factors.

First, the reliance placed in some cases on commercial common sense and surrounding circumstances (e.g. in Chartbrook [2009] AC 1101 , paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision. 

Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve.

The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. Judicial observations such as those of Lord Reid in Wickman Machine Tools Sales Ltd v L Schuler AG [1974] AC 235 , 251 and Lord Diplock in Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191 , 201, quoted by Lord Carnwath JSC at para 110, have to be read and applied bearing that important point in mind. 

Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party. 

The fifth point concerns the facts known to the parties. When interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties. Given that a contract is a bilateral, or synallagmatic, arrangement involving both parties, it cannot be right, when interpreting a contractual provision, to take into account a fact or circumstance known only to one of the parties.

Sixthly, in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the court will give effect to that intention. An example of such a case is Aberdeen City Council v Stewart Milne Group Ltd 2012 SC (UKSC) 240 , where the court concluded that “any … approach” other than that which was adopted “would defeat the parties' clear objectives”, but the conclusion was based on what the parties “had in mind when they entered into” the contract: see paras 21 and 22. 

Seventhly, reference was made in argument to service charge clauses being construed “restrictively”. I am unconvinced by the notion that service charge clauses are to be subject to any special rule of interpretation. Even if (which it is unnecessary to decide) a landlord may have simpler remedies than a tenant to enforce service charge provisions, that is not relevant to the issue of how one interprets the contractual machinery for assessing the tenant's contribution. The origin of the adverb was in a judgment of Rix LJ in McHale v Earl Cadogan [2010] HLR 412 , para 17. What he was saying, quite correctly, was that the court should not “bring within the general words of a service charge clause anything which does not clearly belong there”. However, that does not help resolve the sort of issue of interpretation raised in this case.

It is not appropriate in this case to reformulate the guidance given in the Rainy Sky and Arnold cases; the legal profession has sufficient judicial statements of this nature. But it may assist if I explain briefly why I do not accept the proposition that the Arnold case involved a recalibration of the approach summarised in the Rainy Sky case. 

The court's task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. In Prenn v Simmonds [1971] 1 WLR 1381 , 1383H–1385D and in Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as HE Hansen-Tangen) [1976] 1 WLR 989 , 997, Lord Wilberforce affirmed the potential relevance to the task of interpreting the parties' contract of the factual background known to the parties at or before the date of the contract, excluding evidence of the prior negotiations. When in his celebrated judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 , 912–913 Lord Hoffmann reformulated the principles of contractual interpretation, some saw his second principle, which allowed consideration of the whole relevant factual background available to the parties at the time of the contract, as signalling a break with the past. But Lord Bingham of Cornhill in an extrajudicial writing, “A New Thing Under the Sun? The Interpretation of Contracts and the ICS decision” (2008) 12 Edin LR 374, persuasively demonstrated that the idea of the court putting itself in the shoes of the contracting parties had a long pedigree. 

Lord Clarke of Stone-cum-Ebony JSC elegantly summarised the approach to construction in the Rainy Sky case [2011] 1 WLR 2900 , para 21f. In the Arnold case [2015] AC 1619 all of the judgments confirmed the approach in the Rainy Sky case: Lord Neuberger of Abbotsbury PSC, paras 13–14; Lord Hodge JSC, para 76 and Lord Carnwath JSC, para 108. Interpretation is, as Lord Clarke JSC stated in the Rainy Sky case (para 21), a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause (the Rainy Sky case, para 26, citing Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299 , paras 13, 16); and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: the Arnold case, paras 20, 77. Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms. 

This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: the Arnold case, para 77 citing In re Sigma Finance Corpn [2010] 1 All ER 571 , para 12, per Lord Mance JSC. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each. 

Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. The iterative process, of which Lord Mance JSC spoke in Sigma Finance Corpn [2010] 1 All ER 571 , para 12, assists the lawyer or judge to ascertain the objective meaning of disputed provisions. 

On the approach to contractual interpretation, the Rainy Sky and Arnold cases were saying the same thing. 

The recent history of the common law of contractual interpretation is one of continuity rather than change. One of the attractions of English law as a legal system of choice in commercial matters is its stability and continuity, particularly in contractual interpretation.

Clause 3.1 begins with the words: “In consideration of the payment of Airline Royalties to [Virgin] by [Alaska], [Virgin] grants to [Alaska] the right … to use the Marks only in connection with and in the ordinary course of carrying on the Licensed Activities”. (Footnote: ⁴)

The term “Licensed Activities” means, “…the activities described in Schedule 1…”.

3.6 provides:

“Subject to Clause 3.7, [Alaska] undertakes that, for as long as it provides the Licensed Activities it shall continue to do so using the Names and shall use all reasonable efforts to promote its conduct of the Licensed Activities under the Names.”

Clause 3.7 provids:

“Notwithstanding any other provision of this Licence nothing in this Licence shall prohibit [Alaska] at any time during the Term from electing to perform the Licensed Activities or any other activities, including, but not limited to, operating flights, code sharing arrangements with any other airlines or entities, or operating flights between any points regardless of where such flights originate or terminate, without the payment of royalties, so long as [Alaska] does not use the Names or Marks while undertaking such activities. […]”

Clause 8.1 provides as follows:

“In consideration of the Airline Rights granted pursuant to Clause 3, [Alaska] agrees to pay [Virgin]:

(a)

with effect from the Effective Date and until December 31, 2015, a quarterly royalty which shall be 0.5% of Gross Sales in respect of each Quarter or part of a Quarter;

(b)

with effect from January 1, 2016 and until the Trigger Date, a quarterly royalty which shall be 0.7% of Gross Sales in respect of each Quarter or part of a Quarter; and

(c)

with effect from the Trigger Date and for the remainder of the Term, a quarterly royalty which shall be 0.5% of Gross Sales in respect of each Quarter or part of a Quarter

In each case, subject to the requirement that [Alaska] will in each financial year during the Term pay at least the annual Minimum Royalty in accordance with Clause 8.6.”

Clause 8.6 states

“For the avoidance of doubt, [Alaska’s] obligation in respect of payment of royalties due to [Virgin] in each financial year of [Alaska] is to pay the greater of (a) a royalty based on a percentage of [Alaska’s] Gross Sales in the relevant period, at the rates set out in Clauses 8.1 and 8.3 above, and (b) the Minimum Royalty payment applicable for that period.

[set out full clause]“Where the Reconciliation Statement reveals an underpayment of any amount due to [Virgin], the amount of such underpayment shall be paid in full by [Alaska] within 20 days following receipt of a relevant invoice from [Virgin]. […]””

Minimum Royalty is a defined term, and is defined as follows:

“Minimum Royalty: means in respect of each financial year of the Licensee, the amount of US$7,978,200 (or a pro rata part of such amount in the case of a partial fiscal year); such amount to be adjusted annually on the Year 1 End Date and any anniversary thereof to increase (but not decrease) by the same percentage as the percentage change in USCPI over the relevant period;”

First, it states that the payment of royalties is: “In consideration of the grant of the Airline Rights granted pursuant to Clause 3”, defined as “the rights granted by [Virgin] to [Alaska] pursuant to Clause 3 of this agreement”. Clause 3 goes on to define the scope and extent of the rights granted to Alaska. Therefore, the payment of royalties is not, it was argued, in consideration of the actual use of the Virgin brand, or in consideration of the generation of revenues: the payment of royalties, including the Minimum Royalty, is in consideration for the grant of the rights to use the Virgin brand as defined in Clause 3.

Second, the primary method for calculating and paying the royalty is quarterly, by reference to a percentage of quarterly “Gross Sales”. Gross Sales are defined, broadly, as revenues received “in connection with the carrying on of the Licensed Activities”. The Licensed Activities have a lengthy definition in Schedule 1 of the Current TMLA but essentially comprise the operation of an airline in the US and other defined territories. Thus, the primary obligation is the payment of royalties quarterly based on a given percentage of revenues generated from the operation of a US airline.

Third, however, the primary obligation is subject to the Minimum Royalty Obligation in the event that the primary method would produce a figure lower than the Minimum Royalty in any given financial year. They argued that there is nothing in this clause which would disapply it if use of the Virgin brand in connection with the Licensed Activities fell to zero.

Clauses 8.4 and 8.5 set out obligations on Alaska to provide quarterly statements of the Gross Sales within 10 days of the end of each quarter, to pay royalty sums on a quarterly basis alongside the quarterly statements, and to provide an annual statement of Gross Sales within one month of the financial year end (the “Reconciliation Statement”).

The second half of Clause 8.6 then makes clear that if the quarterly payments, in total, fall below the Minimum Royalty, the amount of such underpayment is to be paid.

Thus:

Clause 3.7 means that no royalty is to be payable on non-branded revenues or on non-branded activities. Absent Clause 3.7, the effect of the definition of Gross Sales would be to include revenues from Licensed Activities generated without use of the Virgin brand within the percentage royalty calculations in Clause 8.1. Therefore, on Virgin’s case, Clause 3.7 has an important function to perform: it excludes any revenues not derived from use of the Virgin brand from the royalty calculations. Without Clause 3.7, all US airline revenues would be taken into account. With Clause 3.7, non-branded revenues are excluded from all royalty calculations, and the royalty payments would only be made based on Virgin branded revenues.

This leaves the Minimum Royalty Obligation intact, because the Top Up is simply derived from the amount of royalties paid on branded revenue in the given year, without any consideration of non-branded revenue. On Virgin’s case, Clause 3.7, which was included in identical terms in the earlier 2007 TMLA, means exactly the same thing and performs exactly the same function in both documents.

The fact that Clause 3.7 begins “Notwithstanding any other provision…” is consistent with the above: those words are necessary to ensure that Clause 3.7 is effective both to permit non-branded operations in the first place, and also to exclude non-branded revenues from the quarterly royalty calculations. However, the fact that Clause 3.7 takes precedence over any other clause is only relevant to the extent Clause 3.7 comes into conflict with another clause. It does not come into conflict with the Minimum Royalty provisions, because the latter do not set out a royalty applicable to non-branded activity. Therefore, it was argued, Clause 8.6 stands irrespective of Clause 3.7.

without Clause 3.7, the obligation would be to use only the Virgin brand, which was a matter of significant concern to the DOT in around 2007 (‘must use’);

without Clause 3.6, there would be no obligation to use the Virgin brand at all (‘no use’); and

in combination, the result is a ‘some use’ obligation.

The simple fact was that Virgin America made a substantial change filing with the DOT, and drew to its attention a number of documents, including the proposed new TMLA. The DOT saw the proposals in redline form (in fact, in two different redline forms), was specifically aware of the introduction of a Minimum Royalty, and blessed the Current TMLA. The DOT noted the continuing presence of a permission to operate independent of the Virgin Names and Marks without the obligation to pay royalties.

There is no evidence that the DOT was given any specific information about how the Current TMLA would function in the event of a total cessation of use of the Virgin brand. It appears that the Minimum Royalty provisions were not discussed at the first meeting, and there is no (reliable) evidence they were discussed specifically at the second either. Mr Varley’s evidence on this should be rejected.

The court is therefore left without any evidence as to the DOT’s understanding, and trying to second guess what the DOT thought beyond what is contained in the October 2014 Letter. The Court is being asked to engage in pure speculation for which there would be no warrant. It is impossible to see how such speculation could be relevant evidence in determining the proper interpretation of the Current TMLA.

The expert evidence is not helpful on this point.

Alaska’s only remaining argument on this point appears to be that there was a risk that the DOT would have concluded, had they been made aware of Virgin’s interpretation of the Minimum Royalty Obligation, that Virgin America was no longer a US citizen, and that this risk was enough that Virgin’s interpretation would or should have been raised specifically with the DOT if it were the correct one. This argument is wrong:

Virgin was agreeing to grant a 25 year license without a break clause. At the same time it was losing a raft of rights it previously had to block a potential full or partial take-over of Virgin America by a competitor, whereas any competitor would evidently have its own commercial imperatives in respect of the Virgin brand.

Further, the parties would or could have been well aware that using the Virgin brand in the US airline industry, particularly using it to generate a substantial annual royalty of the same scale as the Minimum Royalty, was something which was likely to be difficult and risky. This proposition is supported by the material relating to the initial licensing of Virgin America, as well as by the evidence of Dr Dempsey and Ms Daniels, which I have already considered and which Virgin submitted I should accept.

Virgin’s case was that given the risk that the IPO would create of a de-brand by a competitor (which was admitted and which was confirmed by Mr Varley), it was perfectly logical to bargain for a Minimum Royalty which did not simply cease to be payable if usage of the Virgin brand ceased. Indeed, Virgin submitted, the level of the Minimum Royalty was to increase with inflation (CPI) throughout the longer term, which tended to indicate that it was intended to continue to be payable throughout the term.

Delta made the DOT aware of the potential conflict of Clauses 3.6 and 3.7, and noted that Clause 3.6 must have been retained for a reason.

The DOT noted the possible conflict in its final order, but nonetheless approved the 2007 TMLA. The DOT did not impose a condition requiring the removal of Clause 3.6.

The obvious inference is that the DOT was content with the residual impact of Clause 3.6.

This accords with commercial sense and with the evident wish of the parties to include IP protections for Virgin within the TMLA. If use of the Virgin brand totally ceased, its “Virgin America” marks would be vulnerable to revocation. However, if use in commerce was made of the marks this would not be the case. Accordingly, the obligation to continue to make more than de minimis use made sound commercial sense. As Mr Quinn explained, protections for the Virgin brand were to both Virgin’s and Virgin America’s benefit.

As a preliminary and perhaps fatal point in respect of this argument, it was said that it can hardly be called unconvincing to say that the royalties are payable in consideration for the grant of the rights, when that is literally what the contract says in terms.

Alaska went on to say that if the payments are in consideration of the rights “one would expect an annual flat fee”. But an annual flat fee is payable as a minimum, the Minimum Royalty. That only serves to support Virgin’s case.

Next Alaska says that “it is commercially unrealistic to consider that a licensee would consider paying such a royalty simply for the benefit of the grant of right rather than for use”. Of course a licensee wishing to use the Virgin brand would pay for the right to use, because they intend to exercise that right. In fact, the Current TMLA grants an exclusive right to use. Virgin America clearly did consider the rights it acquired to be valuable rights. It had a business with a turnover of around $1.5 billion (Footnote: ⁵) predicated entirely on the use of the Virgin brand. It was evidently valuable to Virgin America to have the right to use the Virgin brand and to exclude others from it. Moreover, in this regard, the Minimum Royalty was not a significant percentage of Virgin America’s revenue: it was fixed at 0.56% (Footnote: ⁶) of Virgin America’s 2013 revenue. It is of course no surprise whatsoever that Virgin America was willing to pay this amount commercially, given the centrality of the Virgin brand to its business, and the requirement to secure the Virgin brand long-term as part of the IPO.

What Alaska really means is that it would make no sense for Alaska to have agreed to pay the Minimum Royalty. Even this is not clear, because the Virgin brand rights are plainly valuable even when not used: the value of excluding a brand from the market is shown by existing airlines’ trenchant position to Virgin America seeking to enter the market in 2007; precisely how much the Virgin brand rights are worth is not relevant since the court’s role is not to correct a bad bargain. But leaving that point aside, the Current TMLA was agreed between Virgin America and Virgin, at a time when Alaska was a third party competitor. The repeated attempt to argue the commercial rationality points by reference to Alaska’s position is nonsensical and should be rejected.

Finally, Virgin drew attention to Alaska’s argument that the right to terminate in Clause 3.7 is inconsistent with the royalty payments being in consideration for the mere grant of the rights. Virgin has, it said, never argued that the Current TMLA “was about” solely the grant of IP rights. In fact it is a major part of Virgin’s case that the Current TMLA placed an obligation on Virgin America to exercise the IP rights, under Clause 3.6. The only point of relevance for these purposes is that the royalty payments are, expressly, payments in consideration of the grant of the rights. The only trigger for their payment is that the rights are granted. But the Current TMLA is of course “about” far more than just this simple point, Virgin had a right to terminate for non-use (also indeed, for a decrease in use below 80% of total revenues) is entirely consistent with Virgin’s case.

Virgin conferred valuable and exclusive rights on Virgin America. Agreeing to pay a minimum fixed fee was perfectly logical (and the amount was small as a percentage of revenue, albeit that the court is not here to judge whether it was a good bargain). Virgin had, following the IPO, little or no control over whether Virgin America continued to use the Virgin brand, because Virgin America was vulnerable to being taken over. A fixed fee was an obvious solution to that issue.

It was clearly marked out. The terms of Clause 8 are very clear indeed.

In such a scenario, all airline revenues (i.e. all Gross Sales) are derived from use of the Virgin brand.

In each Quarter, Alaska will pay the relevant percentage (0.7% or 0.5% as the case may be) of all Gross Sales to Virgin as royalties pursuant to Clause 8.1.

At the end of the year, Alaska will submit a Reconciliation Statement. If the total amount of royalties paid is below the Minimum Royalty, a Top Up payment is due. If the total amount is above, there is no requirement for a Top Up.

There is no dispute between the parties as regards the operation of the Current TMLA in Scenario 1.

In Scenario 2, not all Gross Sales are derived from use of the Virgin brand.

Absent Clause 3.7, percentage revenues would be due in each Quarter on all Gross Sales (included non-branded revenues). However, there is no dispute that the effect of Clause 3.7 is to exclude non-branded revenues from the operation of Clause 8.1.

As a result, in each Quarter, Alaska will be obliged to pay the relevant percentage of all the Gross Sales derived from the use of the Virgin brand.

At the end of the year, the position is exactly the same as in Scenario 1. The Reconciliation Statement will record the total Gross Sales derived from the use of the Virgin brand, and the amount of royalty paid. A Top Up will or will not be due depending on whether this exceeds the Minimum Royalty.

This is true wherever there are any Virgin-branded revenues at all, even a very small amount of Virgin-branded revenue.

Again, there is no dispute between the parties as regards the operation of the Current TMLA in Scenario 2.

In Scenario 3, Alaska would not be generating any revenues at all.

In such a situation, in each Quarter, there would be no payment due under Clause 8.1. However, at the end of each financial year, the Minimum Royalty would be due.

Virgin argued that Alaska cannot deny this: Alaska’s argument is that Clause 3.7 entitles it to conduct operations outside the Virgin brand without paying royalties in respect of them, and so where there are non-branded revenues, but no branded revenues, the Minimum Royalty ‘latches on’ to the non-branded revenues in breach of Clause 3.7 (and is thus is not due). However, Alaska’s argument cannot apply where there are no non-branded revenues at all. In such a situation, the Minimum Royalty cannot ‘latch on’ to non-branded revenues in breach of Clause 3.7. Accordingly, on Alaska’s own case, the Minimum Royalty would be due and payable in Scenario 3.

On Virgin’s case, this conclusion is perfectly reasonable: the parties bargained for a Minimum Royalty to which there were no exceptions. Therefore, this particular situation is entirely consistent with all the other situations in which at least the Minimum Royalty is payable.

On Virgin’s case, the Minimum Royalty is due each financial year, just as in every other situation. There would be no quarterly percentage-based payments, because there are no relevant revenues: revenues generated without use of the Virgin brand are excluded by virtue of Clause 3.7. Nonetheless, a Top Up equal to the full Minimum Royalty would be due at the end of the year.

On Alaska’s case, there are also no relevant revenues, and therefore no quarterly payments. However, at the end of the year, Alaska says that no Top Up payment is due in this situation. Despite the fact that Clause 3.7 has already discharged its role, by excluding all Alaska’s non-branded revenues (i.e., in this situation, all revenues) from the quarterly royalty calculation, Alaska’s case is that it then has another function at year-end, namely to prevent any Top Up / Minimum Royalty payment being due.

It is very unclear why Alaska says that Clause 3.7 develops this additional, entirely unstated, role. As noted above, the rationale appears to be that a Minimum Royalty, were it to be payable, should be treated as ‘latching on’ to the non-branded revenue. However, that is simply re-writing the entire contract. It is inconsistent with the words of Clause 8, which make clear that the royalties are due in consideration of the grant of the Airline Rights, and it is inconsistent with the role of Clause 3.7, which is to exclude non-branded revenues from the calculation of royalty payments.

A comparison between Scenario 3 and Scenario 4 shows that, on Alaska’s case, whether or not the Minimum Royalty is due is purely a function of the Alaska group’s corporate structure. If, for example, rather than merging Virgin America with Alaska, the Alaska group had chosen to keep the entities separate, transferring Virgin America’s assets to Alaska, and winding down Virgin America’s operations, that would generate Scenario 3 rather than Scenario 4, and on Alaska’s interpretation the Minimum Royalty would still be due. It is purely as a result of Alaska’s decision to structure the business by merging the two entities that has resulted in Scenario 4, rather than Scenario 3. It is inherently unattractive and contrary to business common sense to interpret a contractual payment obligation as purely contingent on the chosen corporate structure of the obligee.

A comparison between Scenario 2 and Scenario 4 also illustrates that Alaska’s interpretation is anomalous. Alaska’s case is that in Scenario 2, as long as there is some branded revenue, the whole Minimum Royalty will be due each year (as a Top Up payable at the end of the year). For example, if Alaska chose to keep operating a single Virgin branded route because that had a particularly loyal customer base, but only generated $10 million in revenue, only $70,000 of percentage-based royalty would be due by way of four quarterly payments. More than $7.9 million would be due as a Top Up, even on Alaska’s case. And yet Alaska says that the minute the branded route is closed and use ceases entirely, none of the Minimum Royalty is due.

Further, as has already been noted Alaska’s interpretation results in Clause 3.7 having a different meaning in the 2007 TMLA and the Current TMLA, despite the words being the same in the two contracts. On Virgin’s case this anomaly does not arise:

It is perfectly true that the consequence of the terms of the 2007 TMLA was that, if all use of the Virgin brand ceased, so would all royalty payments. The obligation in Clause 8 of the 2007 TMLA was to pay a percentage royalty calculated by reference to Gross Sales. However, revenues derived without use of the Virgin brand were excluded from Gross Sales for this purpose, pursuant to Clause 3.7. Therefore, if Virgin branded revenues fell to zero, so did royalties. This was true irrespective of whether there were or were not any non-branded revenues.

This was purely the practical consequence of Clause 8 as it was in the 2007 TMLA as modified by Clause 3.7. It constitutes a substantial leap of logic to move from this single fact about the operation of Clause 8 of the 2007 TMLA, to a general conclusion that Clause 3.7 should be read as meaning “no use of name, no royalty” irrespective of what both Clause 3.7 and the remainder of the amended contract says. In other words, Alaska seeks to argue that because of one practical example of the operation of the 2007 TMLA, the meaning of Clause 3.7 must be adapted from what it actually says (‘Alaska can do NVA without paying royalties’) to mean what it does not say (‘if Alaska does not do VA, it does not have to pay royalties’). That is obviously flawed logic.

To illustrate this point, under the 2007 TMLA, if Virgin branded revenue reduced by 50%, so did the royalty amount. It would of course be nonsensical to derive from this single example under the 2007 TMLA a general proposition that Clause 3.7 required the royalty amount to halve if revenues halved, irrespective of what the other Clauses of the contract said following amendments in the future.

The reality is that Clause 8 changed substantially in the Current TMLA. Therefore, the question of what the royalty obligation would be when use of the Virgin brand halved, or when it ceased, is entirely at large and cannot be answered by reference to what would have been the case under the 2007 TMLA. To answer a question about the Current TMLA by reference to what would have been the case under the 2007 TMLA is just as flawed in relation to a 100% fall in usage as it is to a 50% fall in usage. Indeed, that is clear from the fact that, even on Alaska’s case, royalties do not halve under the Current TMLA just because branded revenue halves. Rather, the Minimum Royalty would remain payable on any view.

The ordinary and natural meaning of the words in Clause 3.7;

The contractual context;

The purpose of Clause 3.7;

The factual background;

Business common-sense and the reasonableness of the results produced by the parties’ constructions.

Alaska started with Clause 3.7, which I have set out above, and which they submitted, is a well-drafted, sophisticated and complex contractual agreement that was prepared with the assistance of skilled professionals is decisive. They submitted that the words in the first sentence of Clause 3.7 were critical.

The language used in Clause 3.7 tracks that used in Clause 8.6, demonstrating that Clause 3.7 frees Alaska of any obligation under Clause 8.6 in respect of operations outside the Virgin brand. In particular both clauses use the term “royalties”, which Clause 8.6 makes clear includes the “Minimum Royalty” (as the Minimum Royalty is one of the two options for the payment of “royalties” identified by Clause 8.6).

Clause 3.7 enables Alaska to elect to perform all of the activities described in Schedule 1 or any other activities without paying royalties so long as it does not use the Names or Marks while undertaking such activities.

It inevitably follows that if the Names or Marks are not used by Alaska at all, Alaska cannot be obliged by the Current TMLA to pay any royalties – including the Minimum Royalty.

Virgin is wrong to suggest the following:

The second sentence of Clause 3.7 only confirms Alaska’s analysis of the first sentence because it gives Virgin, and not Alaska, the ability to terminate the Current TMLA if the Names or Marks are not used in a ‘material manner’, and therefore to avoid any loss from their non-use.

Clause 3.7 creates a very straight forward, common sense and easy to apply regime: if Alaska does not use the Names or Marks it does not pay any royalties in respect of the Names or Marks.

Virgin’s contention that Clause 3.7 cannot have the meaning Alaska suggests because it introduces difficulties where usage ceases part way through a year, or where usage ceases and then resumes, is unconvincing:

Even before the DOT had raised the issue of royalties being paid on revenues derived without using the Names or Marks as a concern, Mr Quinn had identified this as a serious problem in advice he gave to Virgin America and Virgin.

In Virgin America’s January 2007 submissions to the DOT, prior to the March SCO, Virgin America, despite Mr Quinn’s advice, decided to maintain the royalty provision which Mr Quinn had advised the DOT would object to.

Virgin America did however concede and explain that:

As Mr Quinn had predicted, the DOT in the March SCO identified as problematic the payment of royalties where the Names or Marks were not used. The DOT’s conclusion in the March SCO (as set out in paragraph 11 above) was that: “…we see no reason why the applicant’s operations outside of the license should still be subject to a royalty obligation to the Virgin Group”.

The DOT thereby said in terms that activities that did not use the Names or Marks must be royalty free. That, combined with Virgin America’s representation to the DOT that the revised TMLA would enable it operate ‘completely free’ of the Names or Marks (an amendment which the March SCO expressly recorded was made “[i]n response to the Department’s concerns…”), inevitably meant that the DOT required that Virgin America was free to perform all operations without using the Names or Marks, and without paying royalties if it did so.

Virgin has sought to contend (i) that the DOT’s concern was only on ensuring “revenues not derived from use of the brand name” were royalty free, and (ii) that the DOT did not say anything about a situation where all use of the Names or Marks ceased. Alaska argued that that contention was unsustainable once it is recognised that the DOT had accepted Virgin America’s concession to be able to operate “completely free” of the Names or Marks. Where Virgin America operated completely free of the Names or Marks, which is a scenario the DOT expressly contemplated, it is nonsensical to suggest that the DOT’s March SCO (or its final order (Order 2007-5-11)) was consistent with Virgin America having to pay multi-million dollar royalties until 2039 if it ceased using the Names or Marks entirely.

Following the March SCO:

On 18 May 2007 the DOT issued a “final order” in which it found that, subject to fulfilling certain conditions, Virgin America would be a US citizen and fit, willing and able to engage in interstate scheduled air transportation. One of those was the condition in paragraph 3.a.i of Appendix A to that final order.

To enable Virgin America to operate completely free of the Names or Marks. Complete freedom can only mean the freedom not to use the Names or Marks at all if Virgin America so wished; and

To ensure that if Virgin America did not use the Name or Marks it did not have to pay any royalties (i.e. to be completely free). It inevitably follows that if Virgin America did not use the Names or Marks at all, it did not have to pay any royalties at all.

If the DOT wanted to ensure that royalties were not payable on non-branded revenues, it inevitably followed that the DOT wanted to ensure that if there were no non-branded revenues at all then no royalties whatsoever were payable. The latter follows inevitably from the former.

The more one considers the mechanics of Virgin America having to pay a minimum royalty when it makes no use of the Names or Marks, the more obviously unacceptable to the DOT that situation would be. If Virgin America had to pay a minimum royalty when it made no use of the Names or Marks, then necessarily the money to pay the minimum royalty would have to originate from non-branded revenues. That means that, in substance, Virgin America would be paying Virgin a royalty from non-branded revenues. That result was clearly unacceptable to the DOT, and demonstrates why Virgin’s case makes little sense.

For the reasons above, the purpose of Clause 3.7 of the 2007 TMLA was to ensure that if no use was made of the Names or Marks, no royalties would be payable.

On its true construction, Clause 3.7 of the 2007 TMLA reflected that purpose.

All of the material discussed above was known to the parties at the time they concluded the 2007 TMLA, and the Current TMLA. It is admissible as evidence of the objective aim of the transaction in general and Clause 3.7 in particular. Alaska’s case does not, as Virgin suggests, involve any speculation about what the DOT subjectively thought; rather Alaska’s case is based on an objective interpretation of the DOT’s orders and communications with Virgin America (in which Virgin were closely involved).

It is common ground that the effect of Clause 3.7 of the 2007 TMLA and Clause 3.7 the Current TMLA was the same.

The parties knew or could reasonably have known that Virgin America’s initial certification process had been difficult and protracted; in 2014, the parties were seeking to ensure that the Virgin America IPO proceeded successfully and without the DOT objecting; amending the 2007 TMLA so to oblige Virgin America to pay the Minimum Royalty even if the Names or Marks were not used was a matter that Virgin America should have notified the DOT of; failing to notify the DOT of a substantial change would be a breach of Virgin America’s statutory obligations, and could precipitate adverse action by the DOT, to the detriment of Virgin America generally, and the orderly progression of the IPO in particular; there was no discussion between the parties in July to November 2014 of whether Virgin America was obliged to notify the DOT that the 2007 TMLA was being amended to require it to pay royalties even if no use was made of the Names or Marks, or whether Virgin America could run the risk of not telling the DOT expressly about this change.

The parties knew, or could reasonably have known, that what the DOT was expressly told by Virgin America in 2014, and what the DOT understood, prior to the parties concluding the Current TMLA was that, “…the amended TMLA will continue to permit Virgin America the ability to operate independent of the “Virgin” names and marks without the obligation to pay royalties.” The DOT’s understanding was never corrected by Virgin America.

The parties knew, or could reasonably have known, at the time they concluded the Current TMLA that:

The 26 June 2014 email from James Cahillane, to Mr Varley in which he said, “[g]iven that there will be changes to the TMLA post-IPO, are you intending to include something on these in your presentation to the DOT? I think both VEL and VX will want comfort that there will be no DOT issues with the TMLA changes post-IPO” (emphasis added)

The close involvement of Virgin in reviewing and discussing Virgin America’s submissions prior to the IPO to the DOT.

The time critical nature of an IPO, and the advantages to both sides of a successful IPO.

On 26 June 2014, i.e. shortly before the 8 July 2014 presentation to the DOT, James Cahillane, General Counsel at Virgin Management USA Inc, emailed Mr Varley and said, “[g]iven that there will be changes to the TMLA post-IPO, are you intending to include something on these in your presentation to the DOT? I think both VEL and VX will want comfort that there will be no DOT issues with the TMLA changes post-IPO” (emphasis added). Virgin therefore expressly identified that both parties would want comfort that the DOT would be content with any changes to the 2007 TMLA.

Similarly Virgin America was, in consultation with Virgin, at great pains to identify to the DOT material changes which would affect Virgin America post-IPO: see §51-53 Alaska’s Skel. There is no reason why they would have failed to draw clearly and expressly such an important change to the 2007 TMLA to the attention of the DOT.

US carriers are at pains to maintain good relations with their regulator, the DOT, including by ensuring the DOT considers them to be forthright. It would be inimical to that well known goal of maintaining positive relations with the DOT for Virgin America to have failed to mention a significant change to an important document like the 2007 TMLA to the DOT.

In addition, the DOT is a powerful institution, which expects close co-operation with the carriers to which it has granted a CPCN and expects carriers to be professional and conduct themselves with honour and dignity. As was made clear in evidence, “…if there is any question with respect to what a carrier is going to be doing vis-à-vis their authority, they should contact DOT informally to find out what DOT's opinion is.”. Moreover, no carrier wants to end up in the DOT’s bad books, or to have to reverse a transaction or be the subject to adverse action by the DOT, particularly in the context of US citizenship and fitness.

The DOT did not suggest that it was told or knew that in fact Virgin America’s ability to operate independently of the Names or Marks (the requirement that the DOT had imposed in 2007) was limited by the fact that it had to pay the Minimum Royalty even if no use was made of the Names or Marks.

To the contrary, while the DOT understood that when the royalties derived from continued use of the Virgin brand were below the Minimum Royalty, the Minimum Royalty would be paid instead, it still clearly believed that “…the amended TMLA will continue to permit Virgin America the ability to operate independent of the “Virgin” names and marks without the obligation to pay royalties”. That would not be true if in fact the Minimum Royalty was objectively intended by the parties to be due even if no use was made of the Names or Marks.

Initially, Virgin had suggested that amendments be made not out of a desire to reshape the form of Virgin’s licensing arrangement with Virgin America but rather to “get everything into one agreement” based on “[its] expectation…that the licence should effectively continue on the same terms as today, so I have limited the exercise to consolidation”.

Substantive amendments only came to be suggested by Virgin America as a result of concern from the investment bankers who were “concerned that investors would be worried that the agreement might terminate, and so they suggested that…we extend the term”. These concerns prompted the request from Mr Varley that a longer term be included, along with the elimination of the revenue threshold for term extension. Those changes came at a price: namely, the introduction of a Minimum Royalty as well as an increase in the royalty rate until a revenue threshold was reached.

The objective aim of the transaction is therefore clear: to give certainty to Virgin America as to a term extension for its use of the Names and Marks, where such extension was previously dependent on a revenue target that was unlikely to be met and to give a higher and consistent return to Virgin (a higher share of revenue and a minimum royalty in the event that its Names and Marks were used).

To that end, the parties were not interfering at all with the status quo in relation to the position where the Names and Marks were not used. Although (as explored with Mr Varley in XX) Virgin did attempt to introduce a change to the existing position (a “must exclusively use” provision), Mr Varley told Virgin that this would be a “fundamental change to the existing license agreement” and altering language that had been structured to address DOT concerns; the parties then agreed to stick with the 3.6/3.7 regime where Clause 3.6 remained expressly “subject to Clause 3.7.”.

Carriers must be US citizens, and therefore must not be under the actual control of foreign citizens. Whether a carrier is under the actual control of a foreign citizen is determined by applying the ‘totality of circumstances’ test.

Carriers have an obligation to notify the DOT of any changes which substantially alter the factors on which the DOT’s latest fitness finding was based.

Of not telling the DOT that the 2007 TMLA was being amended so as to require the payment of royalties even if the Names or Marks were not used; or

Of Virgin America either prior to or after the IPO, facing action from the DOT as a result of either (i) failing to notify the DOT of the change to the 2007 TMLA or (ii) the change itself.

On the one hand Virgin says it could not readily relicense the Names or Marks. But on the other Virgin simultaneously seeks to say that Virgin America would have paid the Minimum Royalty in order to prevent others in the market using the Names or Marks (an argument premised on Virgin’s ability to relicense readily the Names or Marks).

Whichever way that tension is resolved, Alaska’s construction of the Current TMLA is the correct one:

In my view, it is necessary to read these clauses together and to seek to give content to both, if that is possible.

It is also necessary to take a step back and to ask, in the context of the agreement viewed as a whole, what the likely purpose of these Clauses was. The overall purpose of the agreement was to enable Virgin America to use the Virgin brand. Whilst it is true that they were to be free to fly without using the Virgin brand and without paying royalties on such flights, it is clear that this was a subsidiary matter. What was important was that Virgin America should be free to use the Names and Marks. That is what they were bargaining to be free to use.

It is also clear that where they did not in fact use the Virgin brand, they would not pay royalties. This is because of the mechanics of the calculation of amounts payable; but the point goes no further than this.

The parties did know that the process of getting approval from the DOT in 2007 was a protracted and difficult one.

The parties also knew that the DOT in 2007 had been concerned to ensure both that Virgin America had the ability to carry out flights which would be independent of the association with Virgin, and that such flights would be free of any royalty payments to Virgin.

I accept that Clauses 3.6 and 3.7 had been inserted into the 2007 TMLA to meet these concerns.

It is clear that, by virtue of the IPO and the reduction in Virgin’s rights of control associated with the renegotiations in 2014, Virgin were giving up valuable rights which were material to the issue of whether Virgin America were to be regarded as a US citizen.

It is also clear that, by virtue of the changes in the control structure, the risk of a de-brand was increased.

It is, in my view, clear that the prolongation of the term of the agreement was thought to be in Virgin America’s interest, and it is further the case that Virgin America’s bankers wished for this.

The DOT were fully apprised of the terms of the Current TMLA, having been provided with red-lined versions of that document by the parties.

As regards the evidence of Mr Varley that it was made clear at the meetings that Virgin America had with the DOT that no royalties would be payable if there was no use of the Virgin brand, I do not accept that evidence. Whilst I do not find that Mr Varley was deliberately trying to mislead me, then I take the view that he was led to give evidence which went beyond his true recollection. Certainly there is nothing in the contemporaneous documents to support his evidence, which was (taken overall) not very clear in any event; and his witness statement did not reflect his oral evidence in this regard.

The DOT came back, after their consideration of the TMLA and the meetings with Virgin America, with their letter of 20 October 2014. Each party relied on different parts of that letter. In my judgment, whilst it made reference to the right to fly free of the payment of Royalties, it was also clear that the DOT understood that the TMLA provided for the payment of a Minimum Royalty. I do not think that there is anything in this correspondence which really assists me in relation to the proper construction of the Current TMLA, which I must simply construe by reference to the words used by the parties.

In my judgment, the start point must be the words of the Current TMLA, and in particular Clause 8. I have set out the relevant clauses above. I have concluded that these words are clear. The Minimum Royalty is a defined term, and is a set sum payable for every year of the contractual term, regardless of the level of usage of the Virgin brand. That is clear from the definition of the term, and from the clauses setting out how that sum is to be calculated. Just as that minimum sum falls to be paid if some royalties (not a defined term) are earned in a year but fall short of the Minimum Royalty, so, if no royalties are earned, it remains the case that the minimum sum has to be paid.

I do not think that the fact that the minimum sum is expressed as a “Minimum Royalty” means that it must be derived from royalties in fact earned. Alaska itself contended that for Virgin to be correct, the Minimum Royalty would have to be a flat fee rather than a royalty. In my judgment, that is exactly what the Minimum Royalty is. It is a flat fee payable for the right to use the Virgin brand, whether or not that right is taken up. Again, in that regard, I accept Virgin’s submissions.

In my judgment, this conclusion is supported by what I regard as the most important aspect of the factual matrix, namely the degree of uncertainty introduced by the other changes to the 2007 TMLA in 2014 and the risks undertaken by Virgin as a result of these changes. It is clear that, viewed from the perspective of Virgin America, the extension to the right to use the Virgin brand was a valuable one. It is also clear that Virgin was losing a substantial number of rights of control and that there was, as a result, an enhanced risk of a de-brand. In these circumstances, I think that it is a reasonable commercial conclusion to reach that Virgin would wish to assure themselves of a guaranteed minimum income going forward.

Conversely, I do not regard the factual background matters put forward by Alaska as of any great force, and indeed it is not clear what principle of construction is being relied on in this regard.

Overall, I have concluded that, quite clearly, on the wording of the Current TMLA, the parties did in fact agree that Virgin America should pay a continuing minimum fee for the right to re-use the Virgin brand (whether or not they chose to do so).

First, I agree with Virgin that the question must be approached from the perspective of Virgin and Virgin America as at the date of the agreement, and not from the perspective of Alaska.

Secondly, viewed against this background, it was clearly the case that Virgin America wished to continue to have the right to use the Virgin brand, and was prepared to pay for this.

Thirdly, it was in Virgin America’s interests (and in those of its bankers) to have a long term relationship with Virgin.

Fourthly, it was also relevant to note that Virgin would wish to have some form of comfort to ensure that it was remunerated for giving this approval.

Fifthly, I accept that Virgin’s ability to re-use the Virgin brand in the US was limited, whereas Virgin America’s right was established.

Sixthly, I do not accept that there was any question of Virgin America acting in breach of its statutory obligations. As I have said, the approval of the DOT was necessary. The full terms of the Current TMLA were put before the DOT, who approved that document. Their letter does, it is true, make reference to the right not to use the Virgin brand; but it also makes reference to the fact that a Minimum Royalty is to be paid.

First, Alaska pointed to the definition of Minimum Royalty which refers to a pro rata amount in respect of part years. However, Virgin contended that this was plainly intended to deal with part years at the beginning and end of the term. Whilst, Virgin said, Alaska argued that “[t]here is no meaningful difference between the Current TMLA ending in the middle of a financial year (where pro-rating is expressly provided for), and Alaska ceasing any use of the Names or Marks in the middle of a financial year”, this was incorrect. In point of fact, there were multiple meaningful differences between part years at the beginning and end of the term (which were a necessary consequence of the Current TMLA being executed, and the IPO taking place, in November) and part years of usage. During part years of the term, Alaska would not be the beneficiary of the grant of the right during the whole year. Therefore it was entirely sensible for the fees to be pro-rated. That is not true of part years of usage. Whether to use the Virgin brand on any given day was a matter entirely in Virgin America’s gift, subject to the obligations under Clause 3.6. Further, pro rating for part years of the Term of the Current TMLA was expressly provided for, whereas no such provision was made for part years of non-usage.

Second, Virgin sought to deal with Alaska’s reliance on the Apportionment Act 1870. They argued that it did not assist Alaska to say that the Minimum Royalty is apportioned if it was still due for the remainder of the year where there has been use during the year. In this regard, it was submitted that the Apportionment Act 1870 was brought in to deal with the problem of part-earned consideration. It allows a claimant in certain circumstances to claim part of the consideration where part of the performance due under the contract has been rendered. In this case, apportioning the payment leaves open the question of whether it is due during the part-year for which no use has been made. It is notable, Virgin argued, that Alaska has never gone so far as to say that no consideration is given for the Minimum Royalty in a non-usage year; Alaska’s argument are all of the nature that the price is too high. In fact, Virgin argued, the Apportionment Act 1870 is not applicable. The Minimum Royalty Obligation is not a periodical payment in the nature of income, such as a salary. The Minimum Royalty is simply a minimum figure. The amount due may be more than the Minimum Royalty, if the four quarterly payments due under Clause 8 amount to more than the Minimum Royalty. Further, the amount of the Top Up necessary to meet the obligation to pay at least the Minimum Royalty will vary depending on how much revenue is generated during any given year. This will not be known till the end of the year. This indicates that it is not possible to pro-rate the Minimum Royalty on a daily basis, because the amount due as a Top Up (if any at all) depends on events taking place during the year. Finally, the express provisions of Clause 8, requiring a Top Up at the end of the year, are inconsistent with the application of the Apportionment Act 1870 in the manner which Alaska suggested.

Finally, the argument was put forward that requiring the full Minimum Royalty irrespective of the number of days of use was commercially unreasonable. However, this was not the case, because, as noted above, Virgin’s argument was that the right to use the Virgin brand was valuable consideration.

I accept that this issue does not arise if Virgin is correct on Issue 1. Since, as I have indicated already, it is my view that it is, then this issue becomes an irrelevance.

However, I do not accept that this issue is irrelevant if Virgin is wrong on Issue 1. That is because this issue looks to the question of whether, if Alaska has made some use of the Names or Marks (whether or not it had to) Virgin is entitled to the Minimum Royalty. In my judgment, where some use has been made of the Names or Marks, then, on the true construction of the contract, the Minimum Royalty is payable.

I reach this conclusion, essentially, for the reasons set out by Virgin, which I have outlined above. Both the manner in which the Minimum Royalty is calculated, and the definition of that sum, indicate that where some use is made of the Names or Marks, then the Minimum Royalty is payable; and I accept that the Apportionment Act 1870 is irrelevant (for the reasons argued) and that the provisions for partial use in the contract relate to the years in which partial use is of necessity, given the timing of the contract.