Dual Consent Orders Resolve Competitive Concerns About Chevrons $18 Billion Purchase of Unocal, FTCs 2003 Complaint Against Unocal

Two consent orders announced by the Federal Trade Commission today both resolve the competitive concerns about Chevron Corporation’s (Chevron) proposed $18 billion acquisition of Unocal Corporation (Unocal), and settle the Commission’s 2003 monopolization complaint against Unocal alleging anticompetitive abuses of the regulatory process related to the California Air Resources Board’s (CARB) reformulated gasoline regulations.

Under the terms of the settlement, Unocal will stop enforcing the relevant reformulated gasoline patents, which the Commission alleged could have imposed additional costs of over $500 million per year on California consumers, who already pay among the highest gasoline prices in the United States. In addition, Unocal will release all relevant gasoline patents to the public by the merger’s effective date, potentially saving consumers nationwide billions of dollars in future years.

According to the Commission statement, which is available on the FTC’s Web site as a link to this press release, the acquisition of these Unocal patents by Chevron also would have facilitated coordinated interaction among downstream refiners and marketers of CARB gasoline, which could lead to even higher prices.

“The settlement of these two matters is thus a double victory for California consumers,” said the Commission in its statement. “The settlement provides the full relief sought in the monopolization case and resolves the only competitive issue with the proposed merger. With the settlement, consumers will benefit immediately from the elimination of royalty payments on the Union Oil patents, and potential merger efficiencies could result in additional savings at the pump.” Under a merger plan announced on April 4, 2005, Chevron will acquire 100 percent of the voting securities of Unocal. Unocal will then merge into a wholly owned subsidiary of Chevron that would continue as a single entity. The total value of the transaction is estimated at $18 billion, including approximately $1.6 billion in assumed debt. The transaction is subject to various closing conditions, including the approval of Unocal’s shareholders.

The Administrative Complaint

According to the FTC’s 2003 administrative complaint, in the 1990s Unocal illegally acquired monopoly power in the technology market for producing CARB reformulated gasoline by misrepresenting, among other things, that Unocal’s research was non-proprietary and in the public domain, while at the same time pursuing a patent that would enable it to charge substantial royalties once the research was incorporated by CARB in its RFG regulations.

The complaint further alleged that Unocal engaged in deceptive and exclusionary conduct through its participation in two private industry groups – the Auto/Oil Air Quality Improvement Program (Auto/Oil) and the Western States Petroleum Association (WSPA). As a result, if Unocal is permitted to enforce its patent rights, companies producing CARB reformulated gasoline would be required to pay royalties to Unocal. According to Unocal’s own expert, approximately 90 percent of this royalty charge is likely to be passed on to California consumers in the form of higher gas prices. Unocal’s enforcement of its RFG patents, according to the FTC, could result in hundreds of millions of dollars per year in additional consumer costs as a result of Unocal’s exercise of its monopoly power.

According to the FTC’s complaint, Unocal’s alleged misrepresentations harmed competition and led directly to the acquisition of monopoly power for the technology to produce and supply CARB gasoline. Unocal’s “patent ambush” also allegedly permitted the company to undermine competition and harm consumers in the downstream product market for CARB reformulated gasoline. The complaint alleged that, in the absence of Unocal’s deceptive conduct, CARB would not have adopted RFG regulations that substantially overlapped with Unocal’s patent claims. The complaint further alleged that Unocal’s deceptive conduct prevented other industry members from taking action to avoid or limit the impact of Unocal’s enforcement of its patents.

The Merger Complaint

The FTC’s complaint concerning Chevron’s proposed acquisition of Unocal alleges that the transaction would be anticompetitive and in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act. The Commission’s anticompetitive concerns relate to Chevron’s potential acquisition and enforcement of the relevant reformulated gasoline patents. According to the complaint, the merger would substantially lessen competition in the refining and marketing of CARB reformulated gasoline, as Chevron would acquire the relevant Unocal patents through the acquisition and would be able to use its position to coordinate with its downstream competitors, to the detriment of consumers.

The FTC’s investigation of Chevron’s proposed acquisition of Unocal also led to the conclusion that without the relief imposed by the consent orders, Chevron’s ownership of Unocal’s reformulated gasoline patents likely would result in even greater competitive harm to downstream consumers than would occur if the patents remained in Unocal’s hands. In addition to the royalties that Unocal threatened to collect upon enforcement of the patents, Chevron’s ownership of Unocal would enable it to coordinate interaction among downstream refiners and marketers of CARB gasoline.

The Consent Orders

Under the terms of the consent orders Chevron and Unocal will cease enforcing Unocal’s relevant patents, will not undertake any new enforcement efforts related to the patents, and will cease all attempts to collect damages, royalties, or other payments related to the use of any of the patents. These obligations will become effective on the date Chevron’s acquisition is consummated. Within 30 days of the effective date of the merger, the companies will file the necessary documents with the U.S. Patent and Trademark Office to disclaim or dedicate to the public the remaining term of the relevant U.S. patents.

In addition, the companies will dismiss all pending legal action related to alleged infringement of the patents, including the two actions currently pending before the U.S. District Court for the District of California. Finally, the orders contain standard record-keeping and reporting requirements to ensure the companies’ compliance with their terms. The companies also must distribute copies of the orders to relevant parties. The orders will expire 20 years after the date they become final.

Background

The Commission filed its administrative complaint against Unocal alleging anticompetitive conduct related to the reformulated gasoline patents in March 2003. In November 2003, Administrative Law Judge (ALJ) D. Michael Chappell dismissed the complaint. In July 2004, the full Commission issued a 56-page opinion, overturned the ALJ’s decision, and remanded the matter for an adjudicative hearing. Trial in this matter commenced on October 19, 2004, and concluded on January 28, 2005. The parties were engaged in post-trial briefing when the matter was withdrawn from adjudication on June 8, 2005, for the Commission’s consideration of the consent order resolving the charges. The consent orders announced today, which are subject to public comment, settle the FTC’s complaint against Unocal for engaging in anticompetitive practices.

The Commission vote to accept the consent orders and Commission statement and place copies on the public record was 4-0-1, with Chairman Deborah Platt Majoras recused. The consent orders will be subject to public comment for 30 days, until July 9, 2005, after which the
Commission will determine whether to make them final. Comments should be sent to: FTC, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, DC 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaints, proposed consent orders, and analyses to aid public comment 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 Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission 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. 051-0125 and Docket No. D-9305)