The Federal Trade Commission today issued an administrative complaint against Union Oil Company of California (Unocal) for allegedly committing fraud in connection with regulatory proceedings before the California Air Resources Board (CARB) regarding the development of reformulated gasoline (RFG).
According to the FTC's complaint, in the 1990s, Unocal illegally acquired monopoly power in the technology market for producing Phase 2 "summer-time" CARB gasoline - a formulation of low-emissions gasoline mandated for sale and use in California for up to eight months of the year - by misrepresenting, among other things, that certain information was non-proprietary and in the public domain, while at the same time pursuing a patent that would enable it to charge substantial royalties if the information were used by CARB. As a result, if Unocal is permitted to enforce its patent rights, companies producing Phase 2 "summer-time" CARB gasoline would be required to pay royalties to Unocal to use the patented technology. According to Unocal's own expert, approximately 90 percent of this royalty charge is likely to be passed on to California consumers through higher retail gas prices. Unocal's enforcement of its RFG patents, according to the FTC, could thus potentially result in hundreds of millions of dollars per year in additional consumer costs as a result of Unocal's exercise of its monopoly power.
The FTC complaint further contends that during the CARB rulemaking, Unocal misled industry groups that were participating in the process with regard to its proprietary interests, and that its conduct has resulted in anticompetitive effects in the downstream market for RFG in California, to the detriment of the state's consumers.
"While companies are and must be free to petition the government, the right to petition does not include the right to commit fraud during the CARB regulatory process to obtain monopoly power," said Joe Simons, Director of the FTC's Bureau of Competition. "As a result of Unocal's behavior, companies producing Phase 2 'summer-time' CARB gasoline are liable to pay Unocal very substantial royalties. This action is designed to prevent harm to California consumers that could total hundreds of millions of dollars per year."
Alleged Anticompetitive Conduct
According to the Commission's complaint, Unocal, headquartered in El Segundo, California, violated Section 5 of the FTC Act by subverting California's regulatory standard-setting proceedings relating to low-emissions gasoline. To address California's air pollution concerns, CARB initiated rulemaking proceedings in the late 1980s to determine "cost-effective" regulations and standards governing the composition of low-emissions RFG. Unocal actively participated in these proceedings, the end result of which was the implementation of standards for the production of Phase 2 CARB gasoline. During the rulemaking, Unocal also worked with the industry groups that provided information to CARB during the RFG standard-setting process.
The FTC complaint states that during the RFG rulemaking process, between 1990 and 1994, Unocal made materially false and misleading statements to CARB and other regulatory participants regarding its emissions research results. These research results showed, among other things, the effects of midpoint distillation temperature of gasoline - a property known as T50 - on automobile emissions. While stating that its emissions research results were "nonproprietary" and "in the public domain," according to the FTC's complaint, Unocal failed to disclose that it had pending patent claims on these research results, and that it intended to assert its proprietary interests in the future. The FTC contends that throughout the CARB rulemaking process, Unocal, in its interactions with CARB and other industry participants, intentionally perpetuated the materially false and misleading impression that it had relinquished, or would not enforce, any proprietary interests in its emissions research results regarding T50.
Although the U.S. Patent and Trademark Office notified Unocal in July 1992 that most of its pending patent claims based on its emissions research had been allowed, the FTC alleges that the company concealed this information from CARB and other industry participants during the RFG proceedings.
Resulting Competitive Harm
According to the FTC's complaint, Unocal's alleged misrepresentations have harmed competition and led directly to the acquisition of monopoly power for the technology to produce and supply California "summer-time" RFG, which is mandated from (approximately) March through October. Unocal's "patent ambush" also has allegedly permitted the company to undermine competition and harm consumers in the downstream product market for "summer-time" RFG in California.
In the absence of Unocal's alleged fraud, the FTC's complaint contends, either CARB would not have adopted RFG regulations that substantially overlapped with Unocal's patent claims, the terms on which Unocal was later able to enforce its proprietary interests would have been substantially different, or both.
Unocal's first patent, Patent No. 5,288,393 (the '393 patent) was issued in February 1994, although Unocal did not publicly announce the issuance of this patent and its intention to seek royalties until January 31, 1995. By this time, the refining industry had made billions of dollars in capital expenditures to reconfigure refineries to produce CARB-compliant RFG by the March 1996 effective date of the CARB Phase 2 regulations. Following Unocal's public announcement of the '393 patent in January 1995, the complaint states, the company has obtained four additional patents and vigorously enforced its RFG patent rights through licensing and litigation.
Unocal's enforcement of its RFG patents has led to a court ruling that the major refiners currently producing CARB gasoline that infringes on the '393 patent must pay Unocal 5.75 cents per gallon. Unocal also has filed suit against Valero Energy Company to enforce the '393 patent and its fourth RFG patent, No. 5,837,126 (the '126 patent), and is seeking 5.75 cents per gallon in royalties. The complaint alleges that Unocal's enforcement of its patents could potentially impose hundreds of millions of dollars per year in additional costs to the state's consumers, based on the expert testimony of Unocal's own economic expert that 90 percent of any royalty would be passed on to drivers in the form of higher retail gas prices.
Relief Sought by the Commission
The FTC contends that, through the behavior described in the complaint, Unocal illegally monopolized, attempted to monopolize, and otherwise engaged in unfair methods of competition in the technology market for the production and supply of CARB-compliant "summer-time" RFG. In addition, the FTC contends that Unocal attempted to monopolize and engaged in unfair methods of competition in the downstream CARB "summer-time" RFG market.
Through its complaint, the FTC will seek an order requiring Unocal to cease all efforts it has undertaken to claim infringement or otherwise enforce its RFG patents against companies manufacturing, selling, distributing, or otherwise using motor gasoline to be sold in California. In addition, the Commission will seek an order barring Unocal from undertaking any new efforts to claim infringement or otherwise enforce these patents in the future against companies manufacturing, selling, distributing, or otherwise using motor gasoline to be sold in California. The FTC also is seeking the appointment of a Commission-approved compliance officer to serve as the company's sole representative for communicating Unocal's relevant patent rights to any standard-setting organization of which it is a member and/or any state or federal agency that conducts a rulemaking proceeding in which the company participates.
The Commission vote to issue the administrative complaint was 5-0.
NOTE: The Commission issues or files a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the named parties have violated the law. The administrative complaint marks the beginning of a proceeding in which the allegations will be ruled upon after a formal hearing by an administrative law judge.
Copies of the complaint are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: email@example.com; Telephone (202) 326-3300. For more information on the laws that the Commission enforces, the FTC has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.
(FTC File No.: 011-0214)