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Unocal Hit by 2 Probes

Energy: FTC, patent office are examining whether company improperly got rights to cleaner burning fuel.


August 7, 2001


WASHINGTON -- Federal regulators are investigating a controversial gasoline patent to determine whether Unocal pulled an improper end run in securing the rights to a cleaner burning gasoline that could cost drivers an extra nickel a gallon at the pumps, officials disclosed Monday.

The dual probes by the Federal Trade Commission and the U.S. patent office come after weeks of behind-the-scenes lobbying by major oil companies and state officials in California, who have been pressing federal officials to examine alleged unfair trade practices by El Segundo-based Unocal Corp.

With California gasoline prices at stake, state officials hope to persuade federal regulators to consider doing what the courts have refused to do: throw out Unocal's set of five patents for "reformulated," or cleaner burning, gasoline. The formulas are worth potentially hundreds of millions of dollars a year to Unocal because competitors must pay a royalty if they want to use the process to comply with clean-air standards. The California Air Resources Board, in a letter last month to the FTC, alleged that Unocal withheld information from the state and used "secret" patent applications in the 1990s to claim the rights to the clean-gas recipe--even as the company was working with its competitors and the state to help develop mandated standards for safer tailpipe emissions.

"Unocal's actions threatened the integrity of the rule-making process," and may now mean a 100% markup in the price some refineries have to pay to comply with California's clean-air requirements, wrote Michael P. Kenny, executive officer of the Air Resources Board.

For drivers in California and elsewhere, that could mean an additional 5 cents or more a gallon in the years ahead, oil industry officials predict. Federal officials already have cited the Unocal patent as a secondary factor in last summer's Midwest gasoline crisis, which pushed prices to more than $2 a gallon.

But Unocal Corp. defends its conduct as "above reproach," noting that it has prevailed in legal challenges all the way to the U.S. Supreme Court, and the company says it is confident that its patent will be upheld in the face of this new set of investigations.

The company's adversaries "have lost in every other arena. . . . They're continuing to try to overturn these patents because they don't like the fact that we have them," Unocal spokesman Barry Lane said.

Now it will be up to federal regulators to decide the hotly contested issue. "Our policy is that this is an ongoing investigation . . . and we can't comment on any ongoing investigation," FTC spokeswoman Cathy McFarlane said.

But just the FTC opening an investigation is welcome news to state officials in California, who have been lobbying hard for such a move.

State authorities have been speaking regularly with their FTC counterparts about the issue, and California Atty. Gen. Bill Lockyer made clear in a June 12 letter to the Planning and Conservation League that overturning the Unocal patents is a top priority: "We will work to persuade the [FTC] that action is warranted . . . and that the Commission should take all
appropriate steps to eliminate or minimize the effects of Unocal's patents."

Meanwhile, the U.S. Office of Patents and Trademarks has taken the unusual step of opening a "reexamination" of one of Unocal's reformulated gas patents. Unocal's Lane said the company is providing the agency materials to assist in its review.

At issue in both investigations is how Unocal secured its patents and whether they are valid.

Unocal maintains that its researchers developed the process for developing a cleaner burning gasoline and that the company moved to capitalize on the discovery by lawfully applying for patents in the early 1990s.

But state officials and Unocal's competitors say the company gained a monopoly over the patent only by abusing its role in helping California develop new air standards.

California approved groundbreaking legislation in 1988 aimed at reducing harmful emissions by 2001. To put new standards in place, the Air Resources Board set up a working group of auto manufacturers and gasoline companies, and relied heavily on the group's findings to develop emissions

Participants in the working group agreed that "research results would be dedicated to the public and that no proprietary rights in the research would be sought," Kenny of the Air Resources Board told the FTC in his July 12 letter.

When Unocal announced its patent in 1995, "we didn't even know they had put in for the patent application," Kenney said. "They were participating in the [rule-making] process and making recommendations in a way that ultimately benefited themselves."

Mark N. Melnick, a California deputy attorney general who is working on the case, said Unocal's patented gas formula "isn't really appropriate to be patented because it's the product of a public regulatory process."

But the courts have sided with Unocal: A federal jury in Los Angeles ruled in 1997 that six major oil companies had to pay Unocal 5.75 cents per gallon for violating its patent. That decision was appealed and ultimately was upheld in February this year by the U.S. Supreme Court without comment. The litigants go back to court in L.A. in September to debate the royalty rate and other issues.

In taking their case to federal regulators, state officials plan to present evidence that was offered only "tangentially" in court, according to one official who asked not to be identified because the case is pending.

This tack, the official said, will focus on evidence that the process by which Unocal was granted its patents was flawed and that, even if the patents were valid, the way in which Unocal is using them to demand royalties on an estimated 25 billion gallons of gasoline a year is not.