United States: FTC Alleges Unocal Used "Patent Ambush" To Gain Monopoly Power In Reformulated Gasoline Markets

On March 4, 2003, the Federal Trade Commission ("FTC") filed an administrative complaint charging Union Oil Company of California ("Unocal") with violating Section 5 of the FTC Act by illegally acquiring monopoly power in the technology market for producing California Air Resources Board ("CARB") compliant "summer-time" gasoline and in the downstream product market for CARB compliant "summer-time" reformulated gasoline produced and supplied for sale in California. In the Matter of Union Oil Company of California, Docket No. 9305. The FTC claims that Unocal engaged in a "patent ambush" by making false and misleading misrepresentations and concealing information in order to induce CARB, a state agency, to unknowingly adopt regulations that substantially overlapped with Unocal’s patents. After the regulations were adopted, Unocal revealed the existence of its patents and began suing for patent infringement and requiring companies to license the technology. The FTC alleges harm to competition and to consumers.

Section 5 of the FTC Act empowers the FTC to prevent the use of unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce. 15 U.S.C. § 45. The FTC may file an administrative complaint when it has reason to believe that unfair methods of competition or unfair or deceptive acts or practices are being used. If it determines that the party is in violation of Section 5, the FTC may issue a cease and desist order.

Unocal conducted emissions testing which led to the filing of a patent application in December 1990. Ultimately, Unocal received five patents based upon this research (the "RFG patents"), but Unocal did not publicly announce these patents until 1995.

Beginning in the late 1980s, CARB, a department of the California Environmental Protection Agency, was directed to adopt new standards for automobile fuels and low-emission vehicles in an effort to reduce harmful car emissions. CARB initiated rulemaking proceedings to establish cost-effective regulations and standards for low emissions, reformulated gasoline ("RFG"). The Phase 2 proceedings were intended to develop standards for low emissions RFG, and it was understood that, in order to produce compliant gasoline, refiners would need to make substantial capital investments to their refineries.¹ CARB relied upon industry participants to provide research and results during the Phase 2 proceedings and did not perform any independent studies.

Unocal was one of the industry participants in the CARB RFG rulemaking proceedings. In July 1991, Unocal presented its emissions research to CARB. Unocal did not inform CARB of its pending patent application, but it did request that CARB hold the information confidential as it might represent a competitive advantage. When CARB, at Unocal’s suggestion, agreed to adopt a predictive model approach, Unocal made its RFG research results publicly available. Ultimately, the CARB Board adopted Phase 2 RFG regulations which substantially overlapped with Unocal’s undisclosed patents.

Unocal also participated in and presented its research results to a joint research program, the Auto/Oil Air Quality Improvement Research Program ("Auto/Oil"), and a trade association, Western States Petroleum Association ("WSPA"), during the time of the CARB rulemaking. Unocal represented that the data would be made available to Auto/Oil participants. None of the Auto/Oil or WSPA participants knew of Unocal’s proprietary interests or pending patent application.

In 1995, Unocal announced the issuance of its first RFG patent. Unocal assured both CARB and the Governor of California that it would not interfere with the ability of refiners to produce and supply CARB compliant "summer-time" RFG to the California market.

Unocal was later sued by several refiners seeking to invalidate one of Unocal’s RFG patents. Unocal counterclaimed for patent infringement, and the jury found that Unocal was entitled to 5.75 cents per gallon of RFG.² Unocal has also sued Valero Energy Company for infringement of two RFG patents. Unocal also has licensing agreements with eight other companies for all five of Unocal’s RFG patents which require them to pay between 1.2 and 3.4 cents per gallon of RFG.

The FTC claims that, in order to induce CARB to adopt regulations that overlapped with Unocal’s RFG patents, Unocal misled CARB into believing that Unocal’s RFG research would be available for free for use by RFG producers. The FTC complaint states that Unocal knew CARB was very concerned with how much it was going to cost producers to comply with the new regulations and that Unocal intentionally hid the fact that it was going to add to this cost by seeking royalties for the use of its research. The FTC alleges that if Unocal is able to demand a 5.75 cents per gallon royalty on all "summer-time" CARB compliant RFG, it will cost over $500 million a year, 90% of which will be passed through to consumers.

The FTC claims that Unocal fraudulently gained monopoly power in two markets: (1) the technology market for producing CARB compliant "summer-time" RFG and (2) the downstream product market for CARB compliant "summer-time" RFG produced and supplied for sale in California. The FTC asserts that CARB would not have knowingly adopted regulations that overlapped with Unocal’s RFG patents unless some agreement had been reached limiting Unocal’s ability to collect royalties. The FTC also states that changing the CARB regulations to avoid Unocal’s RFG patents at this time in impracticable, articularly because of the billions of dollars already invested in modifying refineries to comply with the regulations.

Filing this complaint indicates a willingness by the FTC to more readily pursue unfair competition claims in the intellectual property arena. The FTC has taken similar action in the recent past, such as suing VISX in the late 1990’s in an administrative proceeding for allegedly procuring crucial patents in the laser eye surgery industry through fraud and inequitable conduct before the Patent and Trademark Office ("PTO"). In another sign that the federal antitrust enforcement agencies view intellectual property as playing a vital role in our economy and competition generally, the FTC and the Antitrust Division of the Department of Justice held a series of public hearings last year on competition and intellectual property law and policy. The agencies have not yet issued any guidelines or other guidance from these hearings.

The Noerr-Pennington doctrine exempts certain conduct from the antitrust laws. Petitioning for government intervention, even if the desired action is anticompetitive, is protected.³ Noerr-Pennington exempts even fraudulent conduct before legislative bodies, but not before adjudicatory bodies or even "quasi-adjudicatory" bodies. The law is somewhat murky on how to determine whether a regulatory or administrative agency should be treated as adjudicatory or quasi-adjudicatory for purposes of Noerr-Pennington. In this complaint, the FTC claims that the Noerr-Pennington doctrine does not apply to Unocal’s conduct because, "(i) Unocal’s misrepresentations were made in the course of quasi-adjudicative rulemaking proceedings; (ii) Unocal’s conduct did not constitute petitioning behavior; and (iii) Unocal’s misrepresentations and materially false and misleading statements to Auto/Oil and WSPA, two non-governmental industry groups, were not covered by any petitioning privilege."

The courts have recently recognized that the Noerr-Pennington doctrine does not immunize lawsuits brought to enforce patents procured by fraud on the PTO. The FTC seems to be proceeding on a theory that fraud upon a government agency other than the PTO that enables a patent owner to exercise its intellectual property rights to gain monopoly power may similarly not be protected conduct under Noerr-Pennington.