Is a trade mark royalty still due despite de-branding?
Alaska Airlines must continue to pay royalties to the Virgin Group that are due under a trade mark licence agreement – even if it no longer plans to use the Virgin brand. That was the decision of Christopher Hancock KC in a judgment published on 17 February 2023.
Virgin estimated that the decision entitles it to about US$160 million in royalties over a 25-year period.
Origins of the dispute
Virgin America has a complicated history. It was formed in 2004 by a consortium of investors including the Virgin Group. There was a change of ownership in 2010, followed by an IPO on NASDAQ in 2014. The current trade mark dispute arose following Alaska’s acquisition of Virgin America in December 2016.
The trade mark agreement at the heart of the case was agreed in 2014 and replaced the original agreement signed in 2007. It provided for a minimum royalty to be paid to Virgin based on 0.7% of 80% of Virgin America’s 2013 revenues, regardless of the level of the usage of the Virgin brand, for 25 years (up to 2039). The amount would be adjusted for inflation. Virgin America’s 2013 revenue was $1.425 billion.
Following its acquisition of Virgin America, Alaska Airlines decided to wind down use of the Virgin brand – which it did by 30 May 2019. It has made no royalty payments to Virgin since 16 July 2019.
The judge said there were three issues to decide, and he found in favour of Virgin on each of them.
First was the question of whether Alaska is obliged to pay the minimum royalty even if it does not use the marks. After reviewing extensively both parties’ cases, Mr Hancock KC said he preferred Virgin’s arguments as to the proper construction of the agreement. He said the relevant clauses of the agreement were clear that the minimum royalty was a defined term and was a set sum payable for every year of the contractual term:
“if no royalties are earned, it remains the case that the minimum sum has to be paid … [the minimum royalty] is a flat fee payable for the right to use the Virgin brand, whether or not that right is taken up.”
He added that this conclusion was supported by the changes in the ownership of Virgin America in 2014 and the risks undertaken by Virgin as a result:
“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.”
In light of this finding, the second and third issues became irrelevant – but the judge also ruled on them in case his conclusion on the first issue was overturned on appeal.
The second issue concerned whether, if Alaska Airlines stopped using the marks part way through the financial year, the royalty obligation should be modified pro rata. The judge found that the agreement provided that, where some use had been made of the marks, then the minimum royalty would be payable.
The third issue was whether stopping use of all the marks breached the agreement. The judge found that it would, and the measure of loss for the breach of contact would be the amount of the minimum royalty.
What does this mean?
The decision, and the eye-watering sum due in royalties, may lead to some raised eyebrows among readers. However, the judge was clear that once the 2014 agreement was properly constructed in the context of the negotiations and corporate developments leading up to it, the result was inevitable.
The judgment is therefore a reminder of the potential consequences of including terms such as minimum rates and extended terms in IP agreements, and the importance of obtaining legal advice when negotiating such agreements. The Gunnercooke IP team has considerable expertise in advising on IP licensing, so please do contact us if you would like to know more.