Are Royalties still payable under a Licence Agreement if the licensed IP is not being exploited?

The High Court has recently handed down judgment in the long-running feud between Alaska Airlines Inc. and Virgin Group (Virgin Aviation TM Ltd v Alaska Airlines Inc [2023] EWHC 322 (Comm)), in which it ruled that Virgin is entitled to be paid royalties despite the fact that Alaska ceased utilising the Virgin brand in 2019. 

Facts of the case

The case centred around a Trademark Licence Agreement signed in November 2014 between (a) Virgin Group and (b) an entity then known as 'Virgin America', which was originally formed in 2004 by a consortium of investors (including, ironically, Virgin Group) and subsequently acquired by Alaska in December 2016. 

Soon after the acquisition, Alaska made it clear that it intended to drop the Virgin brand in the near future and, indeed, Alaska stopped paying any royalties to Virgin in July 2019. Its General Counsel, Kyle Levine, even went as far as to state that "…there are lots of ways out of the contract" and that Alaska "do not need to keep paying for a brand that we are not using". Unfortunately for Alaska, the High Court did not agree.

In his judgment, Mr Christopher Hancock KC agreed with Virgin's position that the 2014 Licence Agreement contained a clear obligation on Alaska to make a 'minimum' royalty payment each year until the end of the 25-year term notwithstanding the lack of use of the trademarks and names that were the subject of the Licence Agreement. Virgin had submitted that "the minimum royalty is due as a debt, as consideration for the grant of the right to use the Virgin brand, irrespective of whether, and if so how much, the Virgin brand is actually used by Alaska".

Underlying issues

Mr Hancock KC said he had considered three questions:

1. Whether Alaska was obliged to pay the minimum royalty even though it did not use the names or trademarks.

2. If the royalty payment obligations could be modified pro-rata.

3. Was it a breach of contract if Alaska Airlines stopped all use of the names or trademark.

On the first question, he stated that the words of the Licence Agreement were clear and that "the Minimum Royalty is a defined term, and is a set sum payable for every year of the contractual term, regardless of the level of usage of the Virgin brand". 

He also stated that this construction was supported by the facts that existed at the time of the execution of the Licence Agreement in 2014 when Virgin America had determined to IPO. There was no dispute between the parties that the IPO "materially increased the likelihood of Virgin America deciding to decrease or cease its use of the Virgin brand" and a reasonable conclusion to draw was that Virgin had, thus, wanted to "assure themselves of a guaranteed minimum income going forward" in the terms of the Licence Agreement.

In keeping with his determination of the first question, the judge confirmed that, in relation to the second and third questions, the minimum royalty would be payable in full even if there had been some minimal use of the Virgin brand and that Alaska had breached the Licence Agreement by stopping all use of the names and trademarks.

Conclusion

This is a cautionary tale and a reminder that the terms of any IP licence agreements are exceptionally important and should be examined in detail during due diligence of any related corporate transaction. Particular scrutiny should be reserved for consideration clauses in licenses where payments are not intended to be directly connected to licensee sales / turnover.