Unocal Patent on Clean Fuel Stirs Outrage

California Atty. Gen. Bill Lockyer accuses Unocal Corp. of seeking to “hijack and distort” the state regulatory process.

Competing firms accuse the company of manipulating and exploiting the nation’s patent system. Economists also have few kind words, warning that Unocal’s activities could wind up costing consumers at the gas pump.

Unocal’s lawyer says the company simply made a “brilliant” discovery--one the public will grow to appreciate.

What the El Segundo-based company did to cause such a stir was to quietly apply for a patent on cleaner-burning gasoline. Rival companies say that the patent was based on information already well known in the industry that they all had shared as part of a research committee.

A legal battle over the patent has gone all the way to the U.S. Supreme Court, which is expected to decide as early as this week whether it will hear the case.

Unocal was among a group of oil refiners and auto makers that began meeting in the late 1980s to develop cleaner-burning gasoline. The coalition shared research with state regulators who were charged with setting new emission standards.

Then, in a controversial move, Unocal quietly applied for a patent in 1990 on what it describes as independent research by two of its scientists. In 1995--a year before state regulations took effect requiring all Californians to use environmentally friendly fuel--the company announced it held a patent on cleaner-burning gasoline.

The legal battle ensued between Unocal and a group of its competitors, with Unocal racking up a string of court victories. So far, five oil companies have paid Unocal $91 million as a result of the infringement case.

Millions more in potential royalty payments to Unocal hang in the balance as litigation continues.

The stakes are likely to rise because Unocal has obtained four additional patents on reformulated gasoline, and tough federal air standards took effect this year in other polluted regions of the nation.

Company officials contend they have done nothing wrong. No law or agreement required them to disclose their patent application; no evidence has emerged linking their patents to higher gas prices.

Lawyers for Unocal say that their competitors suffer from sour grapes and that Unocal invented a way to help reduce air pollution. “What Unocal did here was brilliant,” said David Beehler, the company’s attorney. “It stood alone.”

Unocal’s critics--and they are many--argue otherwise. They say Unocal filed a broad patent application in anticipation of state requirements for cleaner gasoline. Unocal, they add, later amended the document to reflect the new requirements, making it difficult for competitors to blend reformulated gasoline without infringing on their formulas.

Concern over the case has moved beyond the boardrooms of corporate America and into the political arena. Lockyer, for example, organized support from attorneys general from 32 other states who signed a brief he filed with the Supreme Court last month urging the high court to review the case.

“We think when you patent something that is required by state regulators, it raises a whole host of questions as to the propriety of the patent,” said Marc Melnick, a deputy attorney general in Lockyer’s office.

Unocal officials point out that their critics’ claims have failed to hold up in court and that some competitors pursued patents of their own.

Economists say that if the Unocal patent stands, the royalty payments it is likely to garner could lead to higher gasoline prices for consumers. Estimates range from a penny a gallon to a nickel or more.

“This has the potential to affect reformulated gas prices all over the country,” said Philip K. Verleger, an energy economist in Newport Beach who has worked as a consultant for the oil companies. “Every consumer in the country will pay a Roger Beach royalty tax.” (Beach is Unocal’s chairman and chief executive.)

Some believe the patent already has reduced supply by discouraging rival refiners from blending the cleaner-burning fuel.

“In a perfect world, Unocal wouldn’t be allowed to do this sort of thing because I do think it ultimately made consumers worse off,” said Severin Borenstein, an economist and director of the Energy Institute at UC Berkeley.

Automobile makers and oil companies were drawn together in the first place by the common fear that gasoline would be outlawed in favor of alternative fuels, such as methanol.

“There was a perception that [the coalition] already knew how to change gasoline to make it cleaner-burning,” said Peter Jessup, one of two Unocal scientists who conducted the research that resulted in the patent. “The idea was to create convincing science to show that it was possible.”

From the outset, however, Jessup and colleague Michael Croudace differed with the coalition’s approach to the necessary experiments. The coalition wanted to study four gasoline properties for their emission effects; Jessup and Croudace proposed expanding the number to 10.

The coalition rejected the pair’s proposal in October 1989. Jessup and Croudace went back to Unocal, which gave them the go-ahead to pursue their research.

“Once the [coalition] rejected it and Unocal told Peter he could pursue it on his own, at that point it was clear whatever they discovered would be Unocal’s property,” Beehler said.

Jessup said that by March 1990, he and Croudace had come up with a unique combination of properties that would create cleaner-burning fuels. The patent application was filed the following December.

Unocal officials continued to participate in the coalition and to meet with the staff at the California Air Resources Control Board, which tightened gasoline regulations in 1991.

“We had held many meetings and we were very open with which direction we were going,” said John Courtis, who then was in charge of monitoring the California Air Resources Board’s fuel group. “When the Unocal patent came out and it covered the same thing, everybody felt betrayed.”

Unocal’s amendments to its patent application are a key source of controversy, with critics charging that the changes merely tracked California’s cleaner-burning gasoline regulations.

“Unocal invented nothing here,” said Casey Johnson, an attorney for Exxon Mobil Corp. Exxon and Mobil, when they were still separate companies, were part of the coalition.

Unocal announced in 1995 that it planned to sell its patented formulas to meet the June 1996 deadline for California gas stations to start selling cleaner-burning fuel. Six of the world’s largest oil companies--Exxon Corp., Mobil Oil Corp., Chevron USA Inc., Texaco Refining & Marketing Inc., Atlantic Richfield Co., and Shell Oil Products Co.--sued, seeking to invalidate Unocal’s patent. Unocal counter-sued, claiming its competitors had infringed on its patent.

A jury found in Unocal’s favor in 1997, and ordered the company’s competitors to pay Unocal $69 million for infringing on its patent. The amount broke down to 5.75 cents a gallon on 1.2 billion gallons produced in California during a five-month period in 1996. With interest and attorneys’ fees, the total reached $91 million.

A federal appeals court panel upheld the patent and the full appeals court declined to hear the case.

As the company’s competitors await word from the Supreme Court, Unocal is involved in talks on licensing agreements with still other refineries.

Even if the Supreme Court declines to hear the case, litigation is expected to continue.

Unocal wants a nationwide accounting by the companies--whose numbers have been reduced by mergers from six to five--of gasoline they produced after the five-month period covered in the jury award.

Unocal officials say that, by getting it right the first time, the company prevented costly modifications to their refineries and everyone else’s.

“I believe we have saved the public and the oil industry huge sums of money by doing what we did,” Jessup said. “It’s not unfair that we should be compensated.”