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The Â鶹´«Ã½ Trade Commission today reinstated charges that the Union Oil Company of California violated antitrust laws by defrauding the California Air Resources Board (CARB) in connection with regulatory proceedings regarding development of reformulated gasoline.

The FTC’s March 4, 2003, complaint states that, in the 1990s, Unocal illegally acquired monopoly power in the technology market for producing Phase 2 “summer-time” CARB gasoline – a formulation of low-emissions gasoline mandated for sale and use in California for up to eight months of the year – by misrepresenting that certain information was non-proprietary and in the public domain, while at the same time pursuing patents that would enable it to charge substantial royalties if the information were used by CARB. The complaint alleges that through these misrepresentations, Unocal induced CARB to adopt reformulated gasoline standards that substantially overlapped with Unocal’s patent rights. According to the complaint, Unocal claims that it now is entitled to royalties that potentially could result in hundreds of millions of dollars per year in additional consumer costs. The Commission’s opinion did not rule on the factual validity of these allegations, which have not yet been subject to trial, but rather rejected Unocal’s challenge to the complaint’s legal sufficiency.

In today’s opinion by Chairman Timothy J. Muris, the Commission reversed the ruling of an agency administrative law judge (ALJ) and sent the matter back for factual development. “Depending on the factual record to be developed, Unocal may or may not be subjecting competitors and consumers to massive, anticompetitive royalties and increases in the price of gasoline based on an exercise of unlawfully obtained market power,” the opinion stated. The Commission rejected Unocal’s contentions that the Noerr Pennington doctrine protected its conduct from antitrust scrutiny, and that limitations on FTC jurisdiction barred the complaint as a matter of law. Under Supreme Court precedent, the Noerr Pennington doctrine bars Sherman Act antitrust challenges predicated upon mere attempts to influence the passage or enforcement of laws.

Chairman Muris said, “Unocal’s Noerr-Pennington motion rests on the proposition that a private business may lie to a government rulemaker, misrepresent its intentions regarding the enforcement of its patent rights, and then swing the trap shut after the government has enacted regulations that overlap with the patents.” The opinion continued, “[a]ccording to Unocal, a firm may thereby amass market power and enforce patent rights buttressed by a government mandate in ways never understood nor intended by the government agency, with absolute impunity from antitrust review.” However, “virtually all recent cases hold that in some circumstances false petitioning does not enjoy protection,” wrote Chairman Muris. “The Commission “join[s] this consensus.”

Unocal argued that its communications with CARB and various industry groups were protected by the Noerr-Pennington doctrine. The Commission explained that the Supreme Court has suggested that outside the political context, deceptive practices can constitute abuses of administrative or judicial processes and may result in antitrust violations. According to the Commission, “[T]he fabric of existing law is rich enough to extend antitrust coverage, in appropriate circumstances, to anticompetitive conduct flowing from deliberate misrepresentations that undermine the legitimacy of government proceedings.”

The Commission’s opinion holds that “as a matter of law . . . misrepresentation can warrant denial of Noerr-Pennington protection,” but that “false petitioning loses Noerr-Pennington protection only in limited circumstances, such as when the petitioning occurs outside the political arena; the misrepresentation is deliberate, factually verifiable, and central to the outcome of the proceeding or case; and it is possible to demonstrate and remedy this effect without undermining the integrity of the deceived governmental entity.”

The Commission provided an explanation of the distinction between the political and non-political arenas. “The case law,” it stated, “takes a much broader view than just administrative law distinctions. It considers both the context of the proceeding and the nature of the relevant communications.” The opinion continues, “What we conclude now – when we must take the Complaint’s allegations as established and draw all inferences in favor of Complaint Counsel – is that CARB’s Phase 2 [reformulated gasoline] proceedings exhibit the expectations of truthfulness, limits on governmental discretion, need to rely on petitioners’ factual assertions, and the ability to determine causation typically associated with activities outside the political arena.”

The Commission also rejected Unocal’s contention that “this matter may only be brought, if at all, in a federal district court, which has original jurisdiction over patent questions” and reversed the ALJ’s conclusion that the Commission lacked jurisdiction in this matter. Chairman Muris wrote that “the ALJ 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 market power.”

In concluding, the Commission noted that “[i]t is unfortunate that an erroneous Initial Decision has substantially delayed development” of a factual record in this matter. “It is now time for the ALJ assiduously to assemble the facts and compile a record necessary and sufficient for resolving the underlying issues.”

The Commission vote to issue the opinion and the accompanying order was 5-0.