Virgin Aviation TM Ltd v Alaska Airlines Inc. (formerly Virgin America Inc.)
| Jurisdiction | England & Wales |
| Judge | Christopher Hancock |
| Judgment Date | 16 February 2023 |
| Neutral Citation | [2023] EWHC 322 (Comm) |
| Docket Number | Case No: CL-2019-000742 |
| Court | Queen's Bench Division (Commercial Court) |
[2023] EWHC 322 (Comm)
Christopher Hancock KC
Sitting as a Judge of the High Court
Case No: CL-2019-000742
IN THE HIGH COURT OF JUSTICE
KING'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Daniel Toledano KC and Joshua Crow (instructed by Slaughter and May) for the Claimants
Tom Weisselberg KC and Edward Ho (instructed by Jones Day) for the Defendant
Hearing dates: October 10, 11, 12, 17 and 18 2022
Approved Judgment
I direct that no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Christopher Hancock KC SITTING AS A JUDGE OF THE HIGH COURT
This judgment was handed down by the judge remotely by circulation to the parties' representatives by email and release to The National Archives. The date and time for hand-down is deemed to be Thursday 16 February 2023 at 10:30am.
Christopher Hancock KC:
Introduction and factual background.
This is a claim for a declaration in relation to the meaning of a contract dated 19 November 2014 (a contract which, for reasons which will become apparent, is referred to herein as “ the Current TMLA”). That contract was entered into between the Claimants (“ Virgin”), who are part of the well known Virgin Group, and a separate entity, “ Virgin America”, which merged with Alaska Airlines Inc (“ Alaska”) on 20 July 2018. By virtue of that contract, Virgin licensed to Virgin America certain rights to use certain trade marks (hereafter for convenience, the “ Virgin Brand”, referred to throughout this judgment also as the “Names and Marks” or the “Names or Marks”).
The parties produced a very helpful statement of agreed facts prior to the hearing. In the paragraphs that follow, the main relevant facts, taken from that statement, are set out.
The formation of Virgin America
Virgin America was formed in 2004 by a consortium of investors including companies in the Virgin Group. The investors intended that Virgin America would operate an airline in the US.
Under the original bylaws of Virgin America, the Virgin Group had, in effect, a veto right to prevent any sale or merger of Virgin America or any material portion of Virgin America's assets to a US airline operator. 1 Similarly, under the original stockholders' agreement between the Virgin Group and other Virgin America investors, Virgin had the right in its absolute and sole discretion to prevent any transfer of any equity or debt of Virgin America to a US airline operator or to any person holding 5% or more of the voting power of a US airline operator, and it also had a similar veto to that set out in the original bylaws. 2
In 2005, Virgin granted to Virgin America the right to use certain Virgin trade marks under a trade mark licence agreement (the “ 2005 TMLA”). 3 The 2005 TMLA contained the following terms:
(1) Clause 3.6 provided that: “ The User undertakes that, for as long as it provides the Licensed Activities, it shall continue to do so using the Names and shall use all reasonable efforts to promote its conduct of the Licensed Activities under the Names.”
(2) Under Clause 8.1, Virgin America agreed to pay to Virgin an annual royalty calculated as 0.5% of “ Gross Sales”. Gross Sales were defined as “ the total amount received by the User and/or its sublicensees and assignees in connection with the carrying on of the Licensed Activities…”. Thus, Gross Sales referred solely to
revenues from the Licensed Activities, and did not distinguish between revenues attributable to use of the Virgin brand and other revenues.(3) The Licensed Activities were defined in Schedule 1 and, broadly, encompassed the operation of an airline in the US, Canada, Mexico and the Caribbean, and associated activities.
The DOT certification process
In order to operate a domestic airline in the US, Virgin America required certification by the US Department of Transportation (the “ DOT”). Such certification could only be granted to US citizens (as defined in the relevant regulatory provisions).
Virgin America applied for DOT certification in December 2005.
On 27 December 2006, the DOT issued an ‘order to show cause’ (Order 2006-12-23), making a tentative finding that Virgin America was not a US citizen and providing a 14 day period in which Virgin America or other interested persons could comment on the tentative decision. The DOT explained that its decision was “ principally because the applicant's affairs are structured so as to give their actual control to a foreign citizen. We also tentatively conclude that less than 75 percent of the total equity of Virgin America is held by U.S. citizens. Therefore, we propose to deny its application for certificate authority.”
In its detailed explanation of its tentative finding on ‘actual control’, the DOT stated as follows:
(1) By way of summary:
“ In determining actual control, the Department reviews the totality of the circumstances surrounding the relationship between the air carrier and the foreign entity or entities involved. No single factor dictates a finding of foreign or domestic control; rather, all factors are reviewed in combination to determine a foreign entity's ability to influence the actions of an air carrier. We have thoroughly reviewed the record of this case and identified numerous relationships between the applicant and the Virgin Group. Based on our review of the totality of the circumstances and the various indicia of control, we tentatively find that Virgin America is under the actual control of the Virgin Group and Sir Richard Branson.”
(2) The DOT analysed five specific control factors. The fourth factor was the 2005 TMLA. In this regard, the DOT stated:
“ At the very heart of this matter is the contractual arrangement that will govern Virgin America's commercial operations – its licensing agreement with the Virgin Group. There is no doubt from the undisputed record in this proceeding that Virgin America's business plan rests entirely on its ability to implement this agreement, essentially importing the powerful Virgin trademark into the U.S. market. American, Continental, and Delta state that the License Agreement between Virgin America and the Virgin Group further supports their position that the Virgin Group controls the applicant. Delta further states that use of the Virgin brand itself is not a problem, instead pointing to “the fact that the brand and license are inextricably linked with Virgin's principal foreign investor which has other influencing connections to the applicant.”
We tentatively agree.
According to the record, Virgin America entered into the License Agreement to conduct its proposed operations using the “Virgin” name and to build on the brand and add to “its well-recognized attributes of quality, service, value, and innovation.” However, our review of the License Agreement identified several conditions, detailed in the confidential record, that significantly restrict Virgin America's commercial decision-making authority and essentially prevent Virgin America from acting as an independent air carrier. For example, Virgin America is limited to conducting operations exclusively within the United States, and between the United States and Canada, Mexico, and the Caribbean (collectively referred to as the “Territories”). This restriction takes away from the applicant – that is, absent the consent of a foreign citizen – the basic right to conduct international transportation. In addition, the applicant is only authorized to enter into code-sharing arrangements with Virgin Atlantic and to operate aircraft having more than 20 passenger seats and an operational ceiling of no more than 85,000 feet. Moreover, the License Agreement grants Virgin Atlantic the sole right to operate aircraft within the Territories on any routes that have at least three arrival/departure points, one of which is outside the Territories, and similarly to market and operate any code share routes that have at least three arrival/departure points in conjunction with another airline, provided that such route is marketed primarily as a route between a point between the Territories and a point within the United Kingdom, and the part of the route provided by the other airline links and feeds passengers to and/or from the part of the route operated by Virgin Atlantic or another “Virgin” named airline. Therefore based on the foregoing, we must tentatively find that this agreement, including its terms and conditions, represents another significant avenue of control for the Virgin Group over Virgin America's proposed operations.
Although the terms of this license agreement thus play a major part in our tentative decision in this case, our tentative finding does not mean that U.S. air carriers may not enter into franchise or similar marketing arrangements with foreign carriers. We do not believe that U.S. citizenship law necessarily prevents a U.S. air carrier from licensing the trademark of a foreign carrier, as part of an arms-length franchising agreement or from sharing the revenues of the resulting operations with the licensor; we also recognize that a legitimate commercial agreement of this sort would inevitably involve some degree of influence by the licensor over the U.S. carrier's operations. Any such arrangement, however, must be structured so as to preserve fully the independence of the U.S. carrier's decision-making authority — and of its management — as well as preserve the air carrier's ability to exist outside of the franchise. Such arrangements could pass muster if they avoid the appearance, and reality, of foreign control over the purported U.S. air carrier. Independent franchises are permissible; U.S. outlets of...
To continue reading
Request your trial