Chicken, Beef, or Litigation – trade mark licence disputes at 30,000 feet

In Brief:

1. Effective and clear drafting of an intellectual property licence agreement can be key to the licensor securing a successful decision in a dispute many years into the future, and against a party who was not signatory to the original licence agreement.
2. For this reason, and particularly in the context of due diligence by a party acquiring a licensee, the interpretation of the provisions of an intellectual property licence agreement must take place with regard to the perspective of the parties who entered into the licence.
3. The detail is in the fine print, and in the initial drafting: is the payment of a fee for the actual use of a licensed intellectual property right or for the right to use the licensed intellectual property right?

Background

The origins of this dispute go back many years. The Virgin Group (“Virgin”), known around the world for expanding from a focus on music into a range of licensed activities under the VIRGIN brand across a variety of sectors, from gyms to trains, first entered the aviation sector with the trans-Atlantic airline, VIRGIN ATLANTIC. The first flight was on 22 June 1984 and, in the coming years, Virgin explored potential airline opportunities around the world.

Virgin America was formed on 26 January 2004 in San Francisco as a low-cost airline, with a primary focus on the West Coast of the United States. It was owned by a consortium of investors, including the Virgin Group. Due to regulatory issues, namely securing approval from the US Department of Transportation (“DOT”) and objections from other US airlines, it took a number of years for Virgin America to obtain a licence to operate commercial passenger flights. The first flights took place on 8 January 2007 between New York and San Francisco and between Los Angeles and San Francisco.

1. 2005 Trade Mark Licence Agreement (2005 TMLA)

In 2005, VAL Trademark Three Limited, the then owner of VIRGIN trade marks and brands (“the Licensed Trade Marks”), granted Virgin America the exclusive right to use certain VIRGIN trade marks under a trade mark licence agreement (the “2005 TMLA”).

The permitted use, or ‘licensed activities’, under the VIRGIN trade marks was for a passenger airline operating in the United States and Caribbean, and where Virgin America agreed to pay to Virgin an annual royalty calculated as 0.5% of Gross Sales.

Before an airline can commence flight operations in the United States, certification by the DOT is required. Virgin America applied for DOT certification in December 2005 but was met with an initial refusal on the basis that the nature of the ‘control’ exerted by the UK owner of the licensed trade marks was such that a US airline could not operate sufficiently independently of this control.

2. 2007 Trade Mark Licence Agreement (2007 TMLA)

In response, Virgin and Virgin America executed a further TMLA (“the 2007 TMLA”) on 9 April 2007. This provided Virgin America with an increased ability to enter into code sharing arrangements with other airlines, entering into marketing agreements with any other airlines or entities, or operating flights between any points regardless of where such flights originate or terminate, without having to pay any royalties to Virgin provided that the Licensed Trade Marks were not used in connection with those activities.

The DOT was satisfied that these changes granted sufficient control and independence to a US airline and issued a certification. Virgin America ticket sales began in July 2007 and the first flight took place on 8 August 2007.

3. 2014 Initial Public Offering

In early 2014, Virgin America decided to make an Initial Public Offering (“IPO”) of shares.

As part of the IPO, there would be reduction in control by Virgin Group as a result of: removal of a series of veto rights; the halving of the Virgin group’s board representation; and decreasing Virgin Group’s holding of voting stock. These steps had two important consequences:

1. Significant decrease in the ability of the Virgin Group to prevent Virgin America being acquired by, or merged with, another airline; and
2. Increase in the likelihood that Virgin America would cease to use the Virgin trade marks and brand.

4. 2014 Trade Mark Licence Agreement (2014 TMLA)

As part of the IPO, the parties entered into a further TMLA (“the 2014 TMLA”). The key changes were:

1. The term of the licence for Licensed Trade Marks was extended to 25 years
2. An increase of the licensing fee payable to Virgin; and
3. The introduction of a Minimum Royalty Fee initially set at US$7,978,200 for each year of the 25 year term of the 2014 TMLA (the “Minimum Royalty Fee”).

The IPO went ahead on 14 November 2014.

5. Acquisition of Virgin America

In December 2016, Virgin America was acquired by Alaska Air Group Inc (“Alaska”) for USD 2.6 billion.

As a result, Virgin America became a wholly owned subsidiary of Alaska and operated alongside Alaska Airlines.

The next two years saw a rapid move by Alaska away from the VIRGIN trade marks and branding:

6. Decision of the High Court

Virgin Aviation TM Limited & Virgin Enterprises Limited v Alaska Airlines Inc. (formerly Virgin America Inc). No: CL-2019-000742 [2023] EWHC 322 (Comm) – 16 February 2023

In essence, this dispute rested on the proper construction of a trade mark licensing agreement and the following question:

• Is Alaska obliged to pay the Minimum Royalty Fee even if it did not use the Licensed Trade Marks? 

Given the sum at issue, approximately USD 160 million, Virgin and Alaska understandably took different positions.

Virgin’s Position

1. The 2014 TMLA explicitly provided for the payment of at least the Minimum Royalty Fee in any given financial year, with no exception.
2. The wording of the 2014 TMLA made clear that the payment of royalties, including the Minimum Royalty Fee, was not in consideration of the actual use of the Licensed Trade Marks but was in consideration of the grant of the right to use the Licensed Trade Marks.
3. 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” being the operation of a US airline.  Thus, the primary obligation was the payment of royalties quarterly based on a given percentage of revenues generated from the operation of a US airline. 
4. However, Virgin submitted that primary obligation is subject to the Minimum Royalty Fee in the event that the primary method would produce a figure lower than the Minimum Royalty Fee in any given financial year. Virgin argued that there was nothing in the 2014 TMLA which would negate the obligation of Alaska to pay the Minimum Royalty Fee even if use of the Licensed Trade Marks and branding in connection with the Licensed Activities reduced to zero. 

Alaska’s position

1. The 2014 TMLA enabled Alaska to elect to perform all of the activities described in the 2014 TMLA, or any other activities, without paying royalties provided it did not use the Licensed Trade Marks while undertaking such activities.  
2. By extension, if the Licensed Trade Marks were not used at all, then Alaska cannot be obliged under the 2014 TMLA to pay any royalties – including the Minimum Royalty Fee. 
3. Since the 2014 TMLA provided that if there was no use then no royalties would be payable, and that the term “royalties” was not defined in the 2014 TMLA, then there was no reason why it should not be given its usual and ordinary meaning and, as a result, would encompass the Minimum Royalty Fee.
4. The 2014 TMLA “creates a very straight forward, common sense and easy to apply regime”: if Alaska does not use the Licensed Trade Marks then it does not pay any royalties in respect of the Licensed Trade Marks.

Decision of the High Court - 16 February 2023

The High Court found in favour of Virgin and the Judge stated:

Overall, I have concluded that, quite clearly, on the wording of the [2014] 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)."

The High Court agreed with Virgin’s contention as to the proper construction of the key clauses. In particular, it held that:

1. The question of whether the Minimum Royalty Fee was payable must be approached from the perspective of Virgin and Virgin America as at the date the 2014 TMLA was entered into, and not from the subsequent perspective of Alaska. 
2. Viewed against this background, it was clear that Virgin America, at the time of execution of the 2014 TMLA, wished to continue to have the right to the Licensed Trade Marks and was prepared to pay for this.
3. It was also relevant to note that Virgin would wish to have some form of comfort to ensure that it was remunerated for giving approval to Virgin America for the use of the Licensed Trade Marks, particularly since the changes to the control structure as part of the IPO meant that the the risk of a de-brand away from VIRGIN had increased.
4. Virgin’s ability to re-use the Virgin brand in the US was limited, whereas Virgin America’s right was established.

On 24 March 2023, the High Court made an order declaring that Alaska must pay Virgin at least the Minimum Royalty Fee each financial year, even where Alaska derived no Gross Sales from the use of the Licensed Trade Marks

Unsurprisingly, Alaska appealed.

7. Decision of the Court of Appeal

Virgin Aviation TM Limited & Virgin Enterprises Limited v Alaska Airlines Inc. (formerly Virgin America Inc). No. CL-2019-000742 EWCA (Comm); Appeal No. CA-2023-000727 [2024] EWCA Civ 622 

The Court of Appeal issued its decision on 11 June 2024 and upheld the decision of the High Court.

It held that the appeal was a “straightforward issue of contractual interpretation” as to whether a provision that Alaska might elect to perform the licensed activities without payment of royalties to Virgin (so long as Alaska did not use the Licensed Trade Marks whilst so doing) overrides Alaska’s obligation under the 2014 TMLA to pay a specified “Minimum Royalty” for each financial year of the 2014 TMLA.

In particular, the Court of Appeal made the following observations on the contractual and commercial interpretation of the 2014 TMLA.

On the contractual interpretation, it held:

The language of the Licence, the factual matrix and commercial considerations all point firmly to Virgin being entitled to at least the Minimum Royalty [Fee] in exchange for the rights Alaska holds for the remainder of the term of the Licence.

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.

The Court of Appeal stated that Virgin’s commercial interpretation was favoured and held:

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.

Conclusion

The decisions of the High Court and the Court of Appeal are a useful and timely reminder that drafting undertaken now in respect of the licensing of intellectual property rights may subsequently (and, perhaps many years later) be the subject of disagreement, and ultimately proceedings, with an entity that was not party to the original licence.

In this case, it was held that Alaska could not potentially hold a licence for 25 years in respect of the Virgin branding, stop others (including Virgin) from using it but, at the same time decide that it would not use the Virgin branding either and be under no obligation to pay the licensor.

This matter highlights the need for effective due diligence by any party that acquires an entity that is a licensee of intellectual property rights.   For example:

• Do the terms of the licence align with the business plans of the acquiring party?
• Are the obligations under that licence clear and understood?
• Is any potential liability to a licensor taken into account when valuing an acquisition?
• What are the fees payable under the licence for? Are they for actual use of the licensed intellectual property right or for the right to use the licensed intellectual property right?

Similarly, from the perspective of a licensor, this case shows that effective contract drafting can help protect the inherent value of the intellectual property rights that the licensor is allowing a third party to use, and can establish a ‘safety net’ in terms of revenue generated from the licensed intellectual property rights, even if the licensee (or its assignee) elects not to use such rights.

For more information, please contact James Dunne, Head of Intellectual Property at j.dunne@hadefpartners.com