Long term agreements still apply even when things change
When a licensee entered into a trade mark licence for 25 years and decided five years in that they did not want to use the trade mark any more, they were still required to pay the large minimum royalties, the Court of Appeal has ruled.
In the case of Virgin Aviation TM Ltd v Alaska Airlines Inc (formerly Virgin America Inc), the Court of Appeal looked at a trade mark licence agreement between VATM as the licensor and its US operating company and decided that the US company was still bound to pay minimum royalties despite a change of direction.
The agreement was for 25 years and was entered into in 2014. It provided for an annual minimum royalty or 0.5% of gross sales (if greater), in return for the US operating company (now Alaska Airlines) being able to use the VIRGIN trademarks. After a merger and change of business focus in 2019, Alaska Airlines stopped all use of Virgin's branding and stopped making the yearly minimum royalties. That was in spite of there being 20 years left to run on the agreement. They referred to a licence provision stating that the licensee could undertake activities covered by the licence but not pay royalties if they did not use the trade marks in the course of those activities; that clause provided a right for Virgin to terminate the agreement.
The High Court had decided that Alaska Airlines must in any event pay the minimum royalty each year even if they did not use the trade marks at all. The Court of Appeal has now dismissed Alaska Airlines' appeal.
The Court of Appeal relied on the 2011 Supreme Court case of Rainy Sky v Kookmin - where a court has to construe a provision in a contract that has more than one potential meaning, it has to go with the one that has the most commercial sense.
In the Virgin case, the Court of Appeal decided that it made more commercial sense for Virgin's termination option to be considered against the fact that there was in any event a minimum royalty payment. It did not see Alaska Airlines' position as having commercial sense, as de-branding altogether would leave the licence useless to Virgin, so what was the point in having the 25 year agreement and then being paid no royalties? It also would not make sense to have such a large difference between a minimum royalty not applying at all if there was a total de-branding and the minimum applying if there was just very minimal use - the purpose of the minimum royalty was to always apply a base level of royalty regardless.
So this had the effect of leaving Alaska Airlines having to pay a minimum royalty for the remainder of the agreement term: 25 years.
What are the takeaways?
This is a salutary lesson for any party to think long and hard about entering into such a long-term agreement. The world is changing ever faster. Looking back five years, that was a world before COVID, the Ukraine war and the subsequent rise and fall in inflation. 10 years ago, Brexit had not happened. And just over 15 years ago, the global financial crisis was taking place. So 25 years, or longer, is a very long time and of course, plenty can change in that time. Who knows what the world will look like in 5 or 10 years from now, let alone 25?
If the parties do think that having such a long term agreement is sensible, the parties should consider building in mechanisms to allow them to respond to a change in circumstances - otherwise, as here, one party could be locked in to an undesired agreement. Force majeure would not have helped here - so the parties should consider having the right to periodically break or renegotiate purely for any change of circumstances.