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18 August 2005
The Federal Trade Commission (FTC) recently agreed to a consent order with the Union Oil Company of California (Unocal) resolving the FTC's allegations that Unocal violated federal antitrust laws by defrauding the California Air Resources Board in regulatory proceedings related to the creation of industry standards for the development of reformulated gasoline. In an unusual development, the consent order was conditioned on the successful acquisition of Unocal by Chevron Corp. Chevron and Unocal simultaneously agreed to identical consent orders that require the parties to cease all efforts to enforce the Unocal patents at issue in the unilateral conduct case and to dedicate Unocal's rights during the remaining term of those patents to the public.
The Chevron/Unocal Merger
Chevron, the second-largest integrated US oil company, agreed to acquire Unocal on April 4 2005 in a stock and cash deal valued at approximately $18 billion. However, the China National Offshore Oil Corp (CNOOC) offered Unocal a higher price in late June 2005, precipitating a bidding war between Chevron and CNOOC. On July 20 2005 Unocal's board of directors recommended that its shareholders accept Chevron's offer at a shareholders' meeting scheduled for August 10 2005; CNOOC subsequently withdrew its bid in response to intense Congressional resistance to its proposal. The Chevron offer was duly approved by the Unocal shareholders on August 10.
The FTC's Unilateral Conduct Case against Unocal
The Unocal Case involves California Air Resources Board regulations creating standards for cleaner-burning reformulated gasoline. The FTC filed its original complaint against Unocal in March 2003, alleging that Unocal misrepresented information regarding the production of its low-emissions fuel, which is mandated for sale and use in California for eight months of the year.
Unocal was pursuing patent rights relating to its reformulated gasoline-related research when the California Air Resources Board began the process of creating reformulated gasoline standards. The FTC alleged that Unocal concealed these efforts and made false and misleading statements regarding its intent not to enforce its patent rights which caused the California Air Resources Board to implement reformulated gasoline standards that could be met only by using Unocal's technology.
Shortly before the California Air Resources Board regulations went into effect, Unocal announced all of its reformulated gasoline patent rights and its intention to collect royalty payments from the refining industry. The FTC's complaint alleged that this conduct constituted attempted monopolization and unreasonable restraints of trade by Unocal in the market for reformulated gasoline in violation of Section 5 of the FTC Act.
An FTC administrative law judge initially granted Unocal's motion to dismiss the complaint in its entirety on November 25 2003. That ruling applied Noerr-Pennington antitrust immunity to efforts, including alleged misrepresentations, to influence the standard-setting functions of a governmental entity. Moreover, the administrative law judge held that the FTC does not have jurisdiction over allegations that depend on the resolution of "substantial questions" of federal patent law.
The FTC disagreed on both points and reversed the administrative law judge's initial decision on July 7 2004, remanding the case to the administrative law judge for the development of a full factual record. It refused to extend Noerr-Pennington protection to Unocal's alleged activity, concluding that the California Air Resources Board proceedings "exhibit the expectations of truthfulness typically associated with activities outside the political arena"(1) and that the alleged misrepresentations were significant, wilful and related to specific and verifiable facts.(2) The FTC also held that the administrative law judge misinterpreted the scope of the FTC's jurisdiction, stating that:
"the administrative law judge and Unocal err through an unduly narrow reading of the FTC Act; an overly broad reading of the statute that confers patent law jurisdiction upon the federal courts; and a fundamental misinterpretation of the nature of the commission's inquiry when patents are among the relevant assets of firms alleged to have unlawfully created or exercised monopoly power."(3)
The parties were engaged in post-trial briefing at the time of the settlement and the administrative law judge's decision was due by September 9 2005.
The FTC analyzed Chevron's proposed acquisition of Unocal and determined that it did not present significant horizontal overlaps apart from Unocal's California Air Resources Board patents that were at issue in its unilateral conduct case against Unocal. It emphasized that, unlike Chevron, Unocal is not a fully integrated petroleum company; instead, its business assets are focused on the upstream segment of the business (ie, the exploration and production of crude oil and natural gas). Virtually all of these upstream overlaps would involve low concentration rates - the combined entity would only have 11.3% of US crude oil production and 11.4% of US crude oil reserves.(4)
The FTC's sole competitive concern was that Unocal's reformulated gasoline
patents would give Chevron, which competes with companies that use Unocal's
patents to produce and market low-emission gasoline, significant access to competitively
sensitive information about other companies' production decisions. For example,
Unocal collects regular reports from licensees detailing their refinery operations
and production of California Air Resources Board gasoline. The FTC feared that
Chevron could use such information to facilitate coordinated interaction with
its downstream competitors, police agreements regarding gasoline production
levels and discourage
Therefore, the FTC tentatively approved (subject to public comment) dual consent agreements linking the resolution of its unilateral conduct claims against Unocal and its review of Chevron's proposed acquisition of Unocal. In separate consent orders contingent on the closing of the proposed merger, Chevron and Unocal both agreed to cease all enforcement efforts regarding Unocal's reformulated gasoline patents and promised not to enforce them in the future. Moreover, the companies agreed not to collect any future fees, royalties or other payments pursuant to the practice of the patents at issue. Finally, they also agreed to disclaim or dedicate to the public all rights under the US patents for the remaining life of those patents within 30 days of the effective date of the acquisition. However, the settlement of the unilateral conduct case is contingent upon the successful completion of the Chevron/Unocal merger and it is not triggered until the effective merger date.(5) If the deal falls through, Unocal faces the prospect of renewed FTC litigation regarding its reformulated gasoline patent practices.
The FTC's decision to link resolution of both its review of the proposed Chevron/Unocal merger and its ongoing challenge to Unocal's unilateral conduct presents a creative and novel solution that is intended to address the competitive concerns in both matters as long as Chevron successfully completes the proposed acquisition. Unfortunately, it resolves the FTC's unilateral conduct claims without firmly defining the boundaries of permissible conduct in the context of standard-setting efforts. Perhaps the FTC's still-pending case against Rambus Inc,(6) which involves similar issues regarding the alleged manipulation of standard-setting processes (albeit in the context of a private standard-setting body), will provide more guidance on this murky area of the law.
For further information on this topic please contact Philip C Larson or Logan M Breed at Hogan & Hartson LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email (firstname.lastname@example.org or email@example.com).
(1) In the Matter of Union Oil Co of Calif, Docket No 9305, Opinion of the FTC at 42, available at www.ftc.gov/os/adjpro/d9305/index.htm.
(4) See Statement of the Federal Trade Commission In the Matter of Union Oil Company of California, Docket No 9305 and Chevron/Unocal, File No 051-0125," June 10 2005, at 2, available at www.ftc.gov/os/adjpro/d9305/050610statement9305.pdf.
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Philip C Larson