Lawyers often spend hours refining the defined terms in contracts to ensure that they capture the nuances of the agreement in question. However, in the 2024 Court of Appeal case of Virgin Aviation Trade Marks Ltd and Virgin Enterprises Ltd v Alaska Airlines Inc, certain defined terms weren’t quite what they seemed…

Since 2005, the UK-based Virgin Aviation Trade Marks Ltd (Virgin TM UK) had been licensing various Virgin trade marks to the Virgin America airline business (Virgin America) under a trade mark licence agreement. 

The key terms of the licence agreement included:

1. When the licence was first negotiated in 2005, the terms of the licence stated that royalties were payable for the licence based upon gross sales of Virgin America’s business. 
2. Then, in 2007, a new term was inserted into the licence to reassure the US Department of Transport that Virgin America was its own business, could determine its own destiny, and wasn’t at risk of being overly controlled by Virgin TM UK. This clause 3.7 provided “Notwithstanding any other provision of this licence, nothing in this licence shall prohibit [Virgin America] at any time during the Term from electing to perform the Licensed Activities or any other activities … without the payment of royalties, so long as [Virgin America] does not use the Names or Marks when undertaking such activities”. That same clause also gave Virgin TM UK a right to terminate the licence if any royalties fell below a certain level. 
3. The licence was renegotiated again in 2014 (when Virgin America was subject to an IPO) and an additional minimum royalty clause was inserted which required Virgin America to pay just under $8 million per year (increasing with inflation). At this time, the licence was also extended to run for 25 years from 2014.

In 2018, Virgin America merged with Alaska Airlines (Alaska). Shortly after that merger, the new combined business de-branded from “Virgin” and Alaska (being the new licensee under the licence agreement as a result of the merger) stopped payment of the trade mark licence fees to Virgin TM UK, including the minimum royalty of $8million per year, on the basis that they were no longer using the Virgin brand. 

The dispute arose as Virgin TM UK attempted to enforce the minimum royalty clause in the licence agreement, while Alaska sought to evade liability for ongoing payments now that the Virgin brand was not being used. The dispute initially went to the High Court which found in favour of Virgin TM UK. 

Alaska appealed the High Court’s decision to the Court of Appeal. The arguments put forward by Alaska were:

1. On language, clause 3.7 clearly said that they could choose to debrand and pay no royalties and the wording “notwithstanding any other provision of this licence” meant that it clearly trumped everything, including the minimum royalty clause.
2. On facts, Alaska noted that it was the US regulator that had required the insertion of clause 3.7 in 2007 and the intention of this clause – to give Virgin America freedom to operate - would have been undermined if it had still been subject to a minimum royalty.
3. On considerations of commercial sense, Alaska argued that it would have made no sense – even in 2014 - to agree to pay such a hefty minimum royalty of $8million per year over a 25 year term without providing a “get out” in the scenario of a rebranding.

In applying the rules on construction of contract terms, the Court of Appeal looked at the language of the agreement itself, the factual matrix surrounding the parties at the time they entered into the contract (i.e. Virgin TM UK and Virgin America – remember, Alaska only became a party to the licence by virtue of the 2018 merger), and considerations of commercial sense. Ultimately, like the High Court before it, the Court of Appeal did not agree with Alaska’s arguments. It said:

1. On language, the so called minimum royalty clause in fact operated effectively as a fixed fee which was payable for the right to use the Virgin brand, whether or not that right was taken up. While clause 3.7 may have entitled Alaska to debrand and not pay genuine royalties on its own sales, it was still subject to the payment of the so-called minimum royalty (or fixed fee) in any event. The inclusion of the phrase “notwithstanding any other provision of this a licence” did not trump the minimum royalties clause as the two could be read in a way that didn’t conflict (i.e. by reading the minimum royalty clause as a minimum fee payment). Further, the inclusion of the phrase “without the payment of royalties” did not absolve Alaska of the obligation to pay the Minimum Royalty (because, as mentioned, this wasn’t considered by the Court to be a genuine royalty).
2. On facts, the Court suggested that the addition of the minimum royalty clause in 2014 could only be interpreted as intending to protect Virgin TM UK from possible future debranding in light of the fact it had given up its “corporate control over Virgin America”.
3. On considerations of commercial sense, the Court disagreed with Alaska’s interpretation as it would mean that: 
   1. If Alaska’s interpretation was right, a debranding by Alaska would render the licence valueless to Virgin TM UK and force it to terminate (effectively giving Alaska a route to termination in all but name).
   2. It would be difficult for Virgin TM UK to know whether to exercise its option to terminate if Alaska was to partially debrand, rather than fully debrand.
   3. Finally, if, according to Alaska, a full debranding would result in no minimum royalty payments, what would happen if there had been a substantial rebranding by Alaska but a continued small use of the trade marks? Applying Alaska’s logic, presumably that would trigger a full minimum royalty payment, no matter how small the use in question; however, there is “no commercial or rationale justification for such an arbitrary distinction with huge financial consequences, which cannot have been intended by the parties”.

In our view, the interpretation of the defined term “Minimum Royalty” as a fixed fee (rather than an actual royalty) is interesting and shows the Court’s willingness to lift the lid of the contract, ignore the defined terms themselves, and really scrutinise the nuances of the arrangements. As a result of this interpretation, the “minimum royalty” clause was not seen to be in conflict with clause 3.7 and, in fact, seemingly sat by itself as a separate payment obligation which was still valid, despite Alaska’s debranding exercise.

The case offers commercial lawyers three key takeaways:

1. It is a basic point of interpretation - but worth remembering - that the issue of primacy between contractual clauses will only come to the fore where one clause conflicts with another in the agreement. Where the clauses can be read in a way which does not produce such a conflict or inconsistency, primacy provisions will not be relevant.
2. If acting for the licensee in a licensing arrangement, be sure to consider whether that licensee will require an escape route from the contract (and any financial obligations thereunder) if it no longer wishes to make use of the rights which it has been granted.
3. Be careful when reviewing these types of agreements for due diligence exercises and ensure that you really interrogate the contract and its impact on your client. One can only wonder if things may have turned out differently if this issue (and the commitment under the agreement to pay $8million per year of “royalties” for almost 20 years) had been flagged to Alaska before the 2018 merger…