Minimum royalty clause means what it says

The English Court of Appeal has published its judgment in the case of Virgin Aviation TM Ltd & Anor v Alaska Airlines Inc (Formerly Virgin America Inc) [2024] EWCA Civ 622. See https://www.bailii.org/ew/cases/EWCA/Civ/2024/622.html

The case concerns the interpretation of royalty clauses in a trade mark licence agreement. Virgin licensed its “Virgin” trade mark to a US company that later changed its name to Alaska Airlines Inc. The licence agreement provided for both a minimum annual royalty and running royalties. In the words of Phillips LJ in the Court of Appeal judgment:

This appeal gives rise to a straightforward issue of contractual interpretation. A trademark licencing agreement dated 19 November 2014 (“the Licence”) provided that, notwithstanding any other provision of the Licence, Alaska (the licensee), might elect to perform the licensed activities without payment of royalties to Virgin (the licensor), so long as Alaska did not use the licensed trade marks whilst so doing. The issue is whether that provision overrides Alaska’s obligation under the Licence to pay a specified “Minimum Royalty” for each financial year of the Licence.

The answer, said Phillips LJ (with whom Andrews LJ and Vos MR agreed), was a simple no. Alaska still had to pay the Minimum Royalty. This was clear from the wording of the agreement, and made business sense. Otherwise, Virgin would be locked into an agreement where it exclusively licensed its valuable Virgin brand but might receive no payments in return.

Phillips LJ was scathing (albeit in judicious language) about the use of court time on such a simple point of interpretation, and the lack of focus on the actual words used in the agreement. Alaska had apparently put forward many points in support of its argument, but none of them was valid. He concluded his judgment in the following terms:

…I would express some cautious concern that the trial of a straightforward issue of contractual interpretation took five Commercial Court days and involved such extensive evidence. Perhaps due to that process, the Judge delivered a 59 page judgment, which only identified the issues in paragraph 51 and the relevant contractual terms in paragraph 78. In the end the Judge’s analysis of the contract terms occupied just two sub-paragraphs in which he did not refer to the central provision, clause 3.7 of the Licence. I am sure that the case looked different at first instance, but would suggest 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.

Why had so much time been spent on irrelevant issues? IP Draughts is speculating, but he wonders if the reasons might have included:

1. When enough money is at stake, parties will take any point they can, no matter how far fetched.
2. And perhaps the argument wasn’t thought be far fetched. Clause 3.7 of the licence agreement provided: “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. […]” [emphasis added]. Did someone in Alaska hope that this reference to royalties included the Minimum Royalty?

IP Draughts is pleased to see a focus on the wording of the contract. Too often, he sees judgments that find a way of ignoring the strict wording of the contract, based perhaps on considerations for fairness and justice, and with the decision dressed up with references to principles of interpretation – the so-called canons of construction.