Patent Accord Clears Way for Sale of Unocal

U.S. regulators, claiming a victory for California motorists, approved Chevron Corp.’s proposed $16.4-billion purchase of Unocal Corp. on Friday after the companies agreed to surrender Unocal’s long-contested patents on the state’s cleaner-burning gasoline.

The Federal Trade Commission said the pact would save California drivers as much as $500 million a year because competitors would not have to pay royalties to Unocal and, eventually, to Chevron for making the reformulated gasoline -- royalties that would have been passed on to drivers.

That would average about 3 cents a gallon, as California consumes nearly 16 billion gallons of gasoline a year.

“This is an important event” for the state’s gasoline market, said David Hackett, president of Stillwater Associates, an industry consulting firm in Irvine.

The settlement also is a major step in Chevron’s bid to complete the purchase of El Segundo-based Unocal, which had vigorously defended its patents and denied wrongdoing.

The companies announced their deal April 4, with Chevron, based in San Ramon, Calif., agreeing to pay about $62 in cash and stock for each Unocal share. The acquisition, which still must be approved by Unocal’s stockholders, is expected to be completed this year.

A Chinese oil company, CNOOC Ltd., said Tuesday that it also was mulling a takeover offer for Unocal that could potentially spark a bidding war for the company. But CNOOC, a division of state-owned China National Offshore Oil Corp., has yet to make a formal offer.

The FTC, which already had filed a civil antitrust lawsuit against Unocal over the gasoline patents, said it had been prepared to challenge the Chevron purchase on the basis of the five patents.

The settlement is a “victory for California consumers,” the FTC said in a statement, adding that the agency had no other antitrust-related concerns about the proposed merger.

The FTC’s suit would be dropped under the agreement. In turn, Unocal and Chevron agreed to “cease and desist from any and all efforts” to enforce the patents or collect royalties on them, and instead will “release all relevant gasoline patents to the public,” according to their consent decree.

Unocal and Chevron also agreed to dismiss all pending patent-related lawsuits that included legal battles between Unocal and other oil companies. Much of that litigation was effectively on hold pending the outcome of the FTC case.

The agreement was praised by Unocal’s competitors and by state Atty. Gen. Bill Lockyer, who had helped the FTC oppose the patents. “No drivers need more relief at the pump” than Californians, and “this agreement helps provide that relief,” he said in a statement.

Several of the major oil companies also had opposed the patents, including industry leader Exxon Mobil Corp.; BP, which owns the Arco brand; Shell Oil, a unit of Royal Dutch/Shell Group; and Valero Energy Corp. Chevron itself had fought the patents before reaching the Unocal deal.

“We are very gratified by the actions of the FTC,” Shell said in a statement. BP spokesman Phil Cochrane said his company was “quite encouraged” by the deal but was reviewing it before commenting further.

Unocal, once the owner of the Union 76 brand, in 1997 divested its retail, marketing and refining operations to focus on the exploration and production of oil and natural gas.

But in the early 1990s, Unocal was one of several companies working with the California Air Resources Board to develop a standard for a cleaner-burning gasoline for the state.

The FTC, in its initial complaint in March 2003, alleged that Unocal also was simultaneously applying for patents on key aspects of the new fuel but hid that fact from others in the group.

As a result, Unocal “illegally acquired monopoly power” to demand royalties from other refiners selling the new gas, which is now a state-required blend, the FTC contended.

In refuting the allegations, Unocal has said that the potential royalties from its patents -- and thus the potential cost that motorists would bear -- ranged from $75 million to $150 million, far less than the FTC’s $500-million estimate.

But the patents already cause California motorists to pay about $150 million a year, or slightly less than a penny a gallon, consultant Hackett said.

That’s because some refiners take special steps to make reformulated gasolines that “avoid the patent restrictions” but that “still stay within California’s strict guidelines,” and that adds to the costs passed on to consumers, he said. Hackett is a former Mobil Corp. executive who helped the company, now part of Exxon Mobil, challenge the patents in the 1990s.

Unocal shares rose 5 cents to $60.24, and Chevron gained 29 cents to $56.30.