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In an initial decision filed on November 25, 2003, and announced today, Administrative Law Judge (ALJ) D. Michael Chappell dismissed a complaint brought earlier this year by the Commission that charged Union Oil Company of California (Unocal) with committing fraud in connection with regulatory proceedings before the California Air Resources Board (CARB) regarding the development of reformulated gasoline (RFG). In issuing his decision, the ALJ stated that Unocal’s conduct constituted “petitioning” of a governmental authority and was therefore entitled to antitrust immunity under the Noerr-Pennington doctrine.

To the extent the complaint contained allegations with respect to Unocal’s conduct toward the Auto/Oil Air Quality Improvement Research Program (Auto/Oil Group) and the Western States Petroleum Association (WSPA), independent of the conduct directed toward the CARB, the ALJ ruled that resolution of those issues would require an “in depth analysis of substantial issues of patent law” that he believed were not within the Commission’s jurisdiction. The ALJ accordingly dismissed the Complaint in its entirety and terminated the ongoing hearing concerning the merits of the Complaint.

The Complaint

In its complaint, announced on March 4, 2003, FTC staff (complaint counsel) alleged that Unocal violated Section 5 of the FTC Act by subverting California’s regulatory standard-setting proceedings relating to low-emissions gasoline. To address California’s air pollution concerns, CARB initiated rulemaking proceedings in the late 1980s to determine “cost-effective” regulations and standards governing the composition of low-emissions RFG. Unocal actively participated in these proceedings, the end result of which was the implementation of standards for the production of Phase 2 CARB gasoline. During the rulemaking, Unocal also worked with the industry groups that provided information to CARB during the RFG standard-setting process.

The complaint stated that during the RFG rulemaking process, Unocal made materially false and misleading statements to CARB and other regulatory participants regarding its emissions research results. These research results showed, among other things, the effects of midpoint distillation temperature of gasoline – a property known as T50 – on automobile emissions. While stating that its emissions research results were “nonproprietary” and “in the public domain,” according to the FTC staff’s complaint, Unocal failed to disclose that it had pending patent claims on these research results, and that it intended to assert its proprietary interests in the future.

The complaint contended that throughout the CARB rulemaking process, Unocal, in its interactions with CARB and other industry participants, intentionally perpetuated the materially false and misleading impression that it had relinquished, or would not enforce, any proprietary interests in its emissions research results regarding T50. Although the U.S. Patent and Trademark Office notified Unocal in July 1992 that most of its pending patent claims based on its emissions research had been allowed, the FTC staff alleged that the company concealed this information from CARB and other industry participants during the RFG proceedings.

According to the complaint, Unocal’s alleged misrepresentations harmed competition and led directly to the acquisition of monopoly power for the technology to produce and supply California “summer-time” RFG, which is mandated from (approximately) March through October. This also allegedly permitted the company to undermine competition and harm consumers in the downstream product market for “summer-time” RFG in California. In the absence of Unocal’s alleged fraud, the FTC staff’s complaint contended, either CARB would not have adopted RFG regulations that substantially overlapped with Unocal’s patent claims, the terms on which Unocal was later able to enforce its proprietary interests would have been substantially different, or both.

Specifically, with respect to the Auto/Oil Group and WSPA, the complaint alleged that Unocal made misrepresentations to both entities and that, but for Unocal’s fraud, these participants in the CARB rulemaking process could have taken several actions to mitigate Unocal’s eventual alleged monopoly power.

Case Timeline

On April 2, 2003, Unocal filed two motions to dismiss the FTC staff’s complaint. The first motion sought dismissal based on immunity under the Noerr-Pennington doctrine. Complaint counsel filed its opposition on April 21, 2003. By order dated August 25, 2003, the parties were required to file reply briefs, with Unocal filing its response on September 9, 2003, and complaint counsel filing on September 26, 2003. Unocal’s second motion, filed on April 21, 2003 (the Market Power Motion), sought dismissal of the complaint for failure to make sufficient allegations that it possesses or dangerously threatens to possess market power.

Summary of the Initial Ruling

In summarizing his initial decision, ALJ Chappell wrote that “there is no set of facts that Complaint Counsel could introduce in support of the violations of law that are alleged in the Complaint that would overcome Noerr-Pennington immunity with respect to Respondent’s efforts to solicit government action.” Accordingly, he in part granted Unocal’s motion to dismiss the complaint based on immunity under Noerr-Pennington. The only exception concerned the allegations regarding Unocal’s conduct directed toward the Auto/Oil Group and WSPA, independent of the conduct directed toward the CARB.

With respect to the complaint’s allegations regarding conduct directed the Auto/Oil Group and WSPA, the ALJ ruled that “there is no set of facts that Complaint Counsel could introduce in support of the violations of law that are alleged in the complaint that would establish that the Commission has jurisdiction to resolve the substantial patent issues which are entangled in and raised by the allegations and violations of the complaint.” Based on this determination, the ALJ stated that the remaining issues raised by Unocal’s motion to dismiss for failure to make sufficient allegations concerning market power were not reached. Accordingly, he denied the remainder of Unocal’s Market Power Motion without prejudice.

Based on the rulings described above, the ALJ stated that “no allegations or violations of the Complaint remain and the Complaint in Docket 9305 is dismissed in its entirety.”

Copies of the Initial Decision by the administrative law judge are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

(FTC File No.: 011-0214; Docket No. 9305)