Suit against Virgin Group could impact its cruise line

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A rendering of a cruise ship with the Virgin brand on its side was included in the lawsuit.
A rendering of a cruise ship with the Virgin brand on its side was included in the lawsuit.

Virgin Group’s much anticipated entry into the cruise business could come to a grinding halt if a federal lawsuit filed March 11 against the enterprise is successful.

The lawsuit alleges that Virgin misappropriated the idea, business plan and other aspects of Virgin Cruises from a blueprint developed by Colin Veitch, a former CEO of Norwegian Cruise Line.

Veitch, who filed the suit in U.S. District Court for the Southern District of Florida, said he created the plan prior to Virgin’s involvement and spent more than a year working on it with Virgin before the terms of the deal were abruptly changed in early 2012.

The Virgin name, owned by Richard Branson, brands numerous ventures, including an airline, a hotel chain and a record label. The suit claims that Virgin’s initial interest lay in licensing its name to the project and that Veitch’s VSM Development would be a partner with Virgin in owning and running the cruise line.

The suit seeks an injunction against Virgin Cruises and a judgment for damages.

In a statement, Virgin Group said it strongly believes the claim lacks merit.

“Richard Branson and the Virgin Group first looked at the cruise market in the late 1970s, and our current team has been exploring the opportunity for more than a decade,” the statement said. “Over the years, we have been in discussions with a number of parties including the plaintiff, and those discussions ceased in 2012.”

Virgin confirmed its long-rumored entry into the cruise business in December. An announcement of a contract to build its two megaships is expected as soon as this month.

According to the lawsuit, those ships will be built at Germany’s Meyer Werft shipyard. A rendering contained in the suit shows a super-sleek, streamlined ship with a fully enclosed bow area and a large window that resembles the visor on a suit of medieval armor.

The familiar Virgin script is written in white letters diagonally across a red-and-gray color scheme.

In the suit, Veitch said the ships are directly modeled on his plan for two “Ultra Ships” that could reap outsized profits and enable a new entrant to breech the high barriers to entry in the cruise business.

Veitch brought the plan to Virgin in 2011 after meeting Anthony Marino, who manages Virgin’s investment program in North America, the suit says.

In addition to the plan, Veitch also brought an investment bank, Allen & Co., assembled a project team and spent a year and “hundreds of thousands of dollars” on development, according to the suit.

Veitch agreed to invest $1 million to $5 million, and Virgin Group agreed to put up as much as $10 million, with most of the funding to be raised from private equity partners through Allen & Co.

Initially, terms called for a fixed return for those partners, with Veitch and Virgin splitting profits above that level 90/10, the suit says. Virgin would get a licensing fee from revenue regardless of profits.

Under the most favorable scenario, Veitch would have earned $315 million over 10 years, according to the suit.

But in February 2012, after Meyer Werft issued a letter of intent to build the two ships, Virgin sent Veitch a revised term sheet drastically reducing his profit share, the suit says.

It would have also required him to be CEO of the new cruise line as a condition for collecting most of that money. Veitch balked.

The suit seeks an order halting construction of the two Virgin ships and, if they are built, a ban on bringing them into U.S. waters, on docking them at U.S. ports and on selling Virgin cruises to U.S. passengers.

Among the things the suit alleges is that Virgin Group broke a confidentiality agreement the two sides signed before they started working together on Virgin Cruises.

“If you use the information that’s protected by a confidentiality agreement, you definitely owe damages,” said Mark Pestronk, a Washington-based lawyer with expertise in travel issues who also writes the Legal Briefs column for Travel Weekly.

“The question will be if the information was really protected under that agreement,” he said.

Pestronk also said federal judges typically put pressure on the parties in such cases to compromise.

“Ninety-nine percent of these cases will settle before they go to trial,” he said.

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