Twist on Rising Pump Prices: Unocal’s Clean-Gas Patent

In these gloomy days, when gasoline prices are so ridiculous it seems cheaper to simply shred a stack of twenties and stuff them down your car’s tank, it’s tempting to view the whole oil industry as a pitiless monolith intent on impoverishing us all.

Tempting, but not as interesting as the reality. Such a view would overlook, for instance, the nasty fight that has pitted most of the industry against El Segundo’s very own Unocal Corp. for 10 years, with hundreds of millions of dollars in profits (or seen another way, in charges at the pump) hanging in the balance.

The battle involves five Unocal patents on formulations for cleaner-burning gasoline. These happen to correspond quite closely with formulations mandated by the California Air Resources Board, or CARB, to achieve, well, cleaner-burning gasoline. That gratifying coincidence -- how much of a coincidence we’ll get to momentarily -- makes the patents worth, by Unocal’s estimate, as much as $150 million a year.

Thus far, the company has collected $91 million from four major oil companies that challenged the patents in federal court in 1997, and lost. The sum covers their manufacture of infringing gasoline for only five months in 1996, at a royalty rate set by a jury at 5.75 cents per gallon. Estimates are pending for later periods, but because the four companies produce up to 80% of California’s gasoline, they’re bracing for a big bill.

More recently, Unocal has peddled licenses to eight smaller regional refiners calling for royalties of about 1 cent to 3 cents per gallon, and has sued another for “willful infringement” -- a claim that could yield damages of more than 17 cents per gallon. Individually, these fees may not count for much in an era of $2 gallons, but in the aggregate they’re not chicken feed. They may mount even faster if California’s clean-burning formulations get adopted across the country.

On the other hand, a Unocal spokesman, Barry Lane, says: “You can’t presume that the license fee is passed on to the consumer.” To which one can only reply: “Uh-huh.”

Although Unocal has successfully defended its patents in every court where they’ve been tested, two challenges remain. One is before the U.S. Patent Office, which is reviewing whether Unocal’s claims for its patents’ novelty weren’t as compelling as they appeared at first. The Federal Trade Commission, meanwhile, is pondering whether it can charge Unocal with fraudulently manipulating CARB’s regulatory process to gain a competitive advantage.

Both cases stem from a factor in Unocal’s providential fortune that has long raised eyebrows: its role as a participant in the oil industry panel that helped CARB develop its fuel regulations in 1989-91. Via this panel, Unocal provided CARB with key laboratory data to guide its rule making -- while secretly applying for a patent that could be worth millions once the rules were in place. It also lobbied for a flexible regulatory approach that, unbeknownst to CARB, could enhance its patents’ applicability. The FTC staff later described this as a “patent ambush.”

Even more telling: Although the company received its first patent in early 1994, it waited a full year to disclose that fact to the world. By then, California refiners had spent so many billions refitting their plants to manufacture the conforming blends that they were locked into either infringing Unocal’s patent or paying a stiff royalty.

Unocal says it was never under any obligation to disclose its patent plans, never broke any procedural rules and played a purely positive role on the advisory panel.

But state officials and the other oil companies portray Unocal more as a sort of corporate Iago, whispering ideas into the ears of the Othellos at CARB while smacking its lips in anticipation of a big score. As Michael P. Kenny, CARB’s general counsel during the regulatory talks, later told the FTC, his agency had adopted the regulations “for the benefit of the people of California, not for the benefit of Unocal.”

One issue on which Unocal and its opponents differ is how much the patents interfere with the free flow of fuel in California. That’s a crucial question these days, when soaring demand leaves scarcely a drop of regional refinery capacity unexploited.

David Hackett, an Irvine-based oil industry consultant, says that refiners’ attempts to “blend around” Unocal’s patents have reduced overall refinery efficiency, costing consumers a cent per gallon of gas. Hackett, who has testified as an expert witness for Exxon Mobil Corp., also contends that potential importers avoid bringing supply into California for fear of running the patent gantlet. He lists revocation of the patents as an indispensable step toward bringing down the state’s gas prices.

Unocal contends that the effect of its patents has been exaggerated. “You’ll hear that we’re singularly responsible for the price of gas,” Lane says. He says that only about 29% of the California gas made by the oil company plaintiffs in the 1997 federal case was judged to have infringed its patents, and that the percentage has probably dropped since then.

But the CARB staff says Unocal’s full portfolio of five patents might eventually prove to cover almost all gasoline manufactured in California.

“The limits of these patents have not yet been tested,” a CARB spokesman says. Only then will anyone know how successful Unocal has been at drilling for reserves not in places such as Alaska and the Gulf of Mexico, but at the patent office.

Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com.