Trademark licence dispute: no set-off clauses and minimum royalty obligations

In Alaska Airlines Inc v Virgin Aviation TM Limited [2025] EWHC 2505 (Comm), Mr Justice Foxton addressed complex questions concerning the interaction between minimum royalty payments, exclusivity obligations, and no set-off clauses in a trademark licensing agreement following Alaska's merger with Virgin America.

Background and contractual structure

The dispute concerned a trademark licensing agreement (TMLA) dating from 2014, under which Alaska (as successor to Virgin America) held rights to use Virgin's marks for airline operations in the United States. The agreement granted "Airline Rights" comprising both usage rights and exclusivity protections, with royalties calculated as a percentage of gross sales subject to an annual minimum royalty (MR) floor of approximately US$8 million.

Alaska ceased using the Virgin brand in 2019 but previous proceedings established its continuing obligation to pay the MR. Alaska subsequently identified an alleged breach by Virgin of the exclusivity obligations through a customer loyalty scheme involving Delta Air Lines, arguing this breach eliminated its payment obligation.

The severability question

Alaska contended the MR was payable exclusively for the exclusivity obligation, such that Virgin's breach caused a total failure of consideration rendering any payment immediately recoverable in restitution. The court rejected this analysis comprehensively.

Clauses 3.1 and 8.1 made clear that "Airline Royalties" were paid "in consideration of the Airline Rights"—a defined term encompassing the complete bundle of usage rights, sub-licensing rights, transferability rights, and exclusivity protections. The MR was not a separate payment but rather a floor mechanism within clause 8.1's single payment obligation. The contractual history supported this interpretation: pre-2014 versions contained identical usage and exclusivity rights without any minimum payment, suggesting no intention to create separate payment streams when the MR was introduced.

The court noted that on Alaska's construction, where gross sales-based royalties exceeded the MR, nothing separately referable to exclusivity would be payable at all—a commercially implausible outcome. The Court of Appeal's earlier observation that Alaska retained valuable rights even without using the marks, including the right to resume usage or transfer the licence, further undermined the severability argument.

No set-off clauses and restitutionary defences

The judgement addressed whether clause 8.9.1—requiring payment "without any set-off or counterclaim whatsoever and free and clear of all deductions or withholdings whatsoever"—prevented Alaska from relying on an arguable restitutionary right as a defence to payment.

Foxton J acknowledged the general principle that where money due under a contract would be immediately recoverable in unjust enrichment if paid, the innocent party need not make payment. However, his Lordship concluded this principle operates as a circuity of action defence rather than a "pure no debt" argument, and appropriately worded no set-off clauses can require such defences to be pursued by independent action.

The distinction proves critical but difficult to formulate precisely. Pure no debt arguments—such as goods never delivered or debt already paid—fall outside no set-off clauses. By contrast, responses asserting that a due debt could be recovered if paid, including through total failure of consideration claims, constitute the type of dispute such clauses are designed to postpone.

Applying this framework, the court held that where the claimant could plead and prove its debt claim, the debt remained capable of assertion through independent action without creating cause of action estoppel, and the disputed issue involved precisely the type of contractual performance dispute no set-off clauses typically address, clause 8.9.1 required payment notwithstanding any arguable restitutionary recovery right.

Condition precedent and implied terms

Alaska's alternative arguments—that compliance with exclusivity obligations was a condition precedent to payment or formed an implied term—fared no better. The court emphasised the commercially surprising consequences: any non-trivial breach would eliminate all payment obligations whilst Alaska retained full licensing rights. The absence of express conditional language, the payment mechanism's structure, and the characterisation of exclusivity obligations as innominate terms all contradicted the condition precedent analysis.

Virgin obtained summary judgement for the MR with interest, whilst Alaska's proposed amendments were refused permission.