The Court of Appeal has upheld the decision of the Commercial Court in Virgin Aviation TM Ltd & Anor v Alaska Airlines Inc (Formerly Virgin America Inc) [2024] EWCA Civ 622, the trial of which took 5 days and involved extensive expert evidence, on the question of the proper interpretation of provisions in a licensing agreement relating to royalty payments.
Background
In 2018, the airline operator "Virgin America Inc." merged with its competitor "Alaska Airlines" (the Defendant). Virgin America Inc., which had partly owned by companies in the Virgin Group (including the Claimants), then ceased to exist and all its rights and obligations were assumed by Alaska.
Under a trademark licensing agreement ("the TMLA"), Virgin Group had granted Virgin America Inc. the exclusive use of certain Virgin names and trademarks. In exchange for those rights, Virgin America Inc. was contractually obliged under Clause 8 of the TMLA to pay an annual royalty of 0.5% of gross sales or a minimum royalty per year pro rata, depending on which was greater. The minimum annual royalty was initially set at US$7,978,200, to increase in line with a price index during the 25-year term of the Licence [5].
Following the merger, Alaska became party to the TMLA. In 2019, it completed the process of de-branding from Virgin, ceasing all use of the Virgin name and trademarks. It made no further royalty payments to the claimants claiming that, under clause 3.7 of the TMLA, it was not required to pay royalties provided that it did not use the Virgin name and trademarks , notwithstanding that the TMLA had a further 20 years to run [6].
Clause 3.7 provided that: "notwithstanding any other provision of the TMLA, nothing prohibited [the Defendant] during the term of the TMLA from electing to perform the licensed activities or any other activities without paying royalties, so long as [the Defendant] did not use the VIRGIN name or marks while undertaking such activities" [7].
The issue was whether Clause 3.7 overrode the Alaska's obligation under Clause 6.8 of the TMLA to pay a "minimum royalty" to the claimant in each financial year, irrespective of whether Alaska derived any gross sales from use of the trademarks. Clause 6.8 provided that: ""For the avoidance of doubt, [the Defendant]'s obligation in respect of payment of royalties due to [the Claimants] in each financial year of [the Defendant] is to pay the greater of (a) a royalty based on a percentage of [the Defendant'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..."'
The Commercial Court had held the minimum payment to be a "flat fee payable for the right to use the Virgin brand, whether or not that right is taken up" at [161(2)].
Decision
The Court of Appeal upheld the decision of the Commercial Court that on true construction of the TMLA, Alaska was contractually obliged to pay the claimants a minimum royalty for the right to use the Virgin brand, irrespective of whether or not that right was exercised. The correct starting point being the language of the agreement, which was to be afforded particular weight on the basis of it being a professionally drawn contract between commercial parties [27].
The correct approach to construction, at least at first instance, was to seek to read all the provisions of the TMLA together, so as to understand its overall meaning and effect. Words that gave primacy to one provision had to be given effect where appropriate, but only to the extent that there would be any inconsistency or conflict with other provisions.
Read in context, Clause 3.7 entitled the defendant to conduct some of its operations without using the Virgin brand and not to pay royalties on those operations, but it did not entitled the Alaska to avoid paying a Minimum Royalty by ceasing all usage of the Virgin brand [28] – [29].
The Court of Appeal's view was that the surrounding factual matrix supported that interpretation. The requirement for a minimum royalty payment was not included in the agreement until 2014, where in giving up corporate control of Virgin America Inc., the Virgin was exposed to the risk of a complete de-brand by Alaska. The Court of Appeal held that the parties plainly did not intend in that context for the newly introduced minimum royalty to be open to defeat by a complete de-brand, leaving Virgin with "no recompense for licensing its rights" [31].
Relevant commercial considerations also strongly favoured the interpretation offered by Virgin, there being "a strong presumption that commercial parties do not intend to provide something for nothing" which conflicted with Alaska's contention that "it should be entitled to hold (and effectively "sterilise") valuable intellectual property rights for up to 25 years, and yet pay nothing. It was plain the Court of Appeal held, that some payment would be expected and indeed required [32].
Discussion
As the Court of Appeal pointed out, this case was one of straightforward contractual interpretation. It expressed "cautious concern", however, as to how the case had been presented. Although the position of both parties on appeal was that the TMLA could be "interpreted simply by reading the words of the document", nevertheless "a considerable amount of documentary, oral and even expert evidence was adduced at the trial" [12].
The trial took 5 Commercial Court days, the implicit suggestion being that the Court of Appeal clearly viewed this as excessive. The resulting 59-page judgment had only identified the issues at paragraph 51, and the relevant contractual terms at paragraph 78. The Judge's analysis of the contract terms occupied just two sub-paragraphs, with no reference to the central provision in issue- clause 3.7 of the TMLA.
The Court of Appeal suggested that "in future, both judges and parties take care, in commercial cases, to focus intently on the contract and the detailed analysis of its terms" [35].
Conclusion
The case provides general guidance as to the approach to contractual interpretation between commercial parties, in particular from a practical perspective, to both parties and judges (and no doubt lawyers also), about the importance of focusing on the relevant contractual terms when dealing with issues of contractual interpretation (regardless of how interesting the factual matrix may be).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.