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Feature Chevron/Unocal

The vanishing billion dollar patent portfolio

When Chevron bid US$18 billion for Unocal in 2005, one of the things that may have caught its eye was the oil company’s patent portfolio. If that was the case, Chevron has probably been left very disappointed

technology and better petrol formulations. This By Victoria Slind-Flor consortium was known as the Auto/Oil research programme. A patent worth as much as US$1 billion is Under the agreement, each member had the casualty of last summer’s merger the right to conduct independent research. between two California-based oil companies, Members were not obliged to tell others in and one company’s participation in a the consortium that they were conducting standards-setting organisation. research, or what they were researching. The patent in question covers clean- Likewise, they did not have any obligation to burning gasoline – known as “summer gas” allow others to participate in their research. – required in California eight months of the Unocal’s pleadings claim that two of the year under regulations issued by the company’s chemists did not think the California Air Resources Board (CARB). Other Auto/Oil programme was looking at petrol states have similar clean-air regulations as formulation issues broadly enough. They does the federal government, but California – suggested the consortium take a more with its huge automobile-related smog expansive approach, but the group rejected problems in the basin – was the the two scientists’ suggestion. first to develop the standards and issue a So the scientists went back to work on regulation. The market is now huge, with their own in Unocal labs and studied the nearly 20 billion gallons of summer gas effects of 10 different gasoline parameters produced in the US every year. on exhaust emissions. They identified seven One of the smaller US oil companies, chemical properties, such as paraffin Unocal Corporation of El Segundo, content and research octane number, that California, owned the patent. Unocal’s would have an impact. Armed with this patent ultimately became the subject of a information, they were able to tinker with 10-year dispute involving six other oil various new gasoline formulations that would companies, the US Patent and Trademark burn more cleanly. According to a Unocal Office, 33 states’ attorneys general and the news release, these formulations were non- Federal Trade Commission. obvious and even counterintuitive. Unocal applied for a US patent on these Dealing with emissions formulations in 1990, and in 1992 received The petrol (gas) patent story hinges on the notice from the USPTO that most of their nexus between Unocal’s particular intellectual patent claims would be allowed. The patent property strategy and an air-quality board’s was prosecuted in-house by Chief Patent gasoline regulations. In 1989, Unocal entered Counsel Gregory Wirzbicki. into an agreement with America’s big three Meanwhile, Unocal was also working with automakers – Ford, Chrysler and General CARB, a state agency mandated to develop Motors – and 13 other US-based oil standards to reduce air pollution. Unocal’s companies to study ways to reduce automobile input was directed towards gasoline emissions nationwide. They pledged to look at reformulation to reduce automobile alternative fuels, developments in auto engine emissions. Other oil companies also

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Chevron/Unocal

participated in this process. Unocal Unocal issued a press statement claiming presented its research results to the Board that rising petrol prices were not related to in mid-1991 and, later that year, CARB the patent or its royalties, but many critics issued regulations for reformulated gas claimed the patents could cost consumers an (RFG). The first petrol was to be available for extra five cents per gallon of petrol. sale in March 1996. Outraged, California Attorney General Bill In early 1994, Unocal received the ‘393 Lockyer then joined with 33 other states’ patent for reformulated petrol. Instead of attorneys general, asking the US Supreme announcing immediately that the patent had Court to review the case. Lockyer said issued, Unocal waited nearly another year to California consumers were the big losers in let other oil companies know, when in the patent battle, since the ruling January 2005 it offeed to license the “potentially allows Unocal to monopolise the relevant technology to them. retail gasoline market and significantly Bill Lockyer increase the price consumers pay for California Attorney General Litigation begins gasoline”. He warned against companies To no one’s particular surprise, the other oil using the patent system to “distort and Outraged by the companies did not fall over themselves in plunder the States’ regulatory process”. Unocal patent eagerness to take a licence. Instead, six of But the attorneys generals’ point of view the largest – Atlantic Richfield Corporation, was not shared by the Bush Administration. , Exxon Corporation, The US Solicitor General filed a brief asking Mobil Corporation, Shell Oil Company and that the high court not grant review, saying Incorporated – immediately headed that inventions that satisfy government off to federal court. They filed suit in Los regulations are entitled to patent protection, Angeles, asking the court to find Unocal’s and that further review of the lower court patent invalid, claiming that reformulated ruling was unwarranted. In February 2001, the petrol was developed from many different Supreme Court rejected the review petition. companies’ formulations. They charged that the patent’s broad claims overlapped the Uniform licence new state regulations. One month later, Unocal offered a carrot to its Unocal hired powerhouse plaintiffs less bothersome competitors. The company litigator Michael Ciresi of Robins, Kaplan, announced a uniform licence to all oil refiners, Miller & Ciresi of Minneapolis, and IP blenders and importers that were not Timothy Muris specialist Laurence Pretty from Los Angeles defendants in the patent case. Unocal Chief FTC Chairman 2000-2004 firm Pretty, Schroeder, Brueggeman & Clark. Executive Charles R Williamson explained that They filed a countersuit for Unocal two weeks the licence was available only to non-litigating Asked court to later, charging the six companies with patent companies because they “did not force us to infringement. At the same time, in a move to spend millions of dollars in attorneys fees and reconsider Unocal silence critics, Unocal announced a decision devote countless hours of staff time to show immunity not to seek injunctive relief that would halt the validity of our patent claims”. the state-mandated introduction of the He said he had seen claims that other reformulated petrol the following March. refiners could “blend around” the patented The infringement trial began in July formulation for less than a cent per gallon. 1997. In October, the jury found Unocal’s But, he insisted, such a work-around was not patent was valid, and three weeks later possible on “a practical sustained basis”. If awarded Unocal damages of 5.75 cents per it were, Williamson said, “we wouldn’t expect gallon of RFG petrol sold by the defendants them to license with us. It seems to us that between 1st March 1996 and 31st July reasonable business people would choose to 1996. This amounted to 1.19 billion gallons, avoid wilfully infringing our patents and yielding damages of US$69 million, which, decide to take the course that is both with interest, totalled US$91 million. The economic and ethical – license.” judge found that the defendants had made A few, relatively small companies did buy unsupportable accusations and engaged in in and take a licence, beginning in May 2001 “vexatious tactics” and awarded attorney with Corporation of Tulsa, fees to Unocal. Oklahoma, a subsidiary of Venezuela’s The defendant oil companies appealed, national oil company, Petroleos de but in 2000, the Court of Appeals for the Venezuela, SA. Others included Tesoro Federal Circuit denied the appeal. Meanwhile, Corporation of San Antonio, Texas, and four more RFG patents issued to Unocal, Tulsa’s Williams Bio-Energy. Unocal said strengthening the company’s potential for several other companies became licensees, domination of the “summer gas” market. but did not reveal their names.

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Chevron/Unocal

Petrol patent timeline

• 1989: Auto/Oil emissions research The defendants, on the other hand, were Then FTC Chairman Timothy Muris authored group formed not amused with Unocal’s licensing gesture, a new complaint which said that “false • December 1990: Unocal applies for and, what’s more, were not ready to accept petitioning does not enjoy protection”. Muris first reformulated gas (RFG) patent closure of the dispute. Exxon, which by then wrote that if Unocal received Noerr- • 1991: Unocal presents research to had become Exxon Mobil, asked the Federal Pennington immunity, this would support California Air Resources Board Trade Commission to look at possible anti- “the proposition that a private business may • 1994: ‘393 patent issues to Unocal trust violations by Unocal. lie to a government rulemaker, misrepresent • 1995: Unocal announces patent and its intentions regarding the enforcement of offers licences to other oil companies The FTC gets in on the act its patent rights, and then swing the trap • Also 1995: Six oil companies file suit And early in 2002, Unocal filed a second shut after the government has enacted challenging patent’s validity patent infringement suit, this time against regulations that overlap with the patents”. • 1996: RFG production begins per Valero Energy Corporation of San Antonio, And, Muris said, the FTC does have CARB requirements Texas. Valero CEO Bill Greehey’s response jurisdiction over patent cases “when patents • 1997: Unocal receives two more RFG was that the patents were invalid because are among the relevant assets of firms patents Unocal “violated anti-competitive laws” and alleged to have unlawfully created or • Also 1997: Jury finds ‘393 patent “manipulated the standard-setting process”. exercised market power”. He told the valid and awards Unocal 5.75 cents In March 2003, the FTC filed a complaint administrative law judge who had earlier per gallon damages charging that Unocal had made false and dismissed the case to get back to work and • 1998: Unocal receives an additional misleading statements to CARB and its “assiduously assemble the facts and RFG patent members. The complaint alleged the company compile a record” to resolve the issues. • 1999: Appeal of 1997 jury verdict lied to CARB by saying its emissions research Meanwhile, back in Unocal headquarters argued in Court of Appeals for the results were in the public domain and not in El Segundo, several suitors had come Federal Circuit (CAFC) proprietary. The FTC also charged that Unocal calling. Unocal, which ranked 268th in the • 2000: Unocal receives another RFG had failed to disclose its patenting activity to most recent Fortune 500 survey, possessed patent CARB, even after the company had received some tempting assets: these included a large • Also 2000: CAFC affirms lower court its notice of admissions from the USPTO in interest in offshore oil reserves and rejects defendants’ petition for 1992 that most of its patent claims would be and production contracts in Indonesia. rehearing allowed. The FTC noted that Unocal did not • Also 2000: defendants ask US even announce its patent until 1995, a time Chevron comes calling Supreme Court for review by which other refiners had invested billions of Chevron Corp, of San Ramon, California, • 2001: US Supreme Court declines dollars to reconfigure their facilities to showed the greatest interest. Both review produce RFG. Chevron and Unocal have long and deep • Also 2001: Unocal offers licence to Joseph Simons, the director of the FTC California roots. non-defendant oil companies and Bureau of Competition, said the royalties Chevron’s origins predate the several take licences Unocal sought from other oil companies could automobile’s arrival in the state by more than • Also 2001: US patent office refuses to bring “harm to California consumers that could 30 years. Its predecessor company made a re-examine one Unocal RFG patent, but total hundreds of millions of dollars per year”. lucky strike in the Santa Susana Mountains announces re-examination of the key He called Unocal’s actions a “subversion” of and started producing from the state’s first ‘393 patent the standards-setting process. oil well in 1876. By 1880, the company was • 2002: Unocal sues Valero for patent Initially, the FTC complaint went nowhere. producing 600 barrels of oil a day and in infringement An administrative law judge dismissed the 1900 was acquired by John D Rockefeller’s • 2003: Federal Trade Commission Commission’s complaint seven months after . issues complaint against Unocal filing. The judge found that Unocal had A landmark, trust-busting US Supreme • Also 2003: Administrative law judge immunity from the charges under the Noerr- Court split Standard Oil (California) off from dismisses FTC complaint Pennington doctrine. This relatively obscure its New York parent in 1911, and the newly • 2004: FTC issues second complaint doctrine, stemming from two US Supreme independent entity began oil exploration in against Unocal Court cases in the 1960s, gives immunity to Middle East, Louisiana, Sumatra, Venezuela • 2005: Chevron agrees to acquire parties lobbying the government to change a and Canada. Standard Oil (California) merged Unocal law, even if the change reduces competition with Standard Oil (Kentucky) in 1961 and in • Also 2005: Chevron and Unocal sign to the parties’ benefit. The judge said that 1984 acquired Gulf Corporation – then the FTC consent decree requiring non- Unocal’s actions with CARB could be seen fifth largest oil company in the US – for enforcement of RFG patents and as the kind of “petitioning” given anti-trust US$13.3 billion. This was the biggest merger dedication of patents to the public immunity under Noerr-Pennington. in history at that point, and made Chevron The judge also determined that the the most significant refiner in the US. Unocal case properly belonged only in In 2001, Chevron picked up another federal court because the dispute involved prize, paying out US$31 billion for Texaco patent questions that are within that court’s Inc. Texaco was founded as a drilling jurisdiction. company in Beaumont, Texas, in 1902 The FTC sat with this ruling for six during the famed Spindletop Texas oil boom. months, then rejected the judge’s finding. The new combined company was pumping

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Chevron/Unocal

2.5 million barrels of oil per day, and in the petrol patents be dedicated to the public, 2005 ranked sixth on the Fortune 500 list, and no further royalties be sought or collected with revenues of almost US$148 billion. after the effective date of the merger. But many of Chevron’s older wells were So the once-powerful patents now have running low. So the company started looking no teeth and all refiners are free to around for new sources of oil. Unocal’s formulate their petrol to meet California – holdings in Thailand and Indonesia looked and ultimately federal – standards. Chevron attractive, as did the company’s natural and Unocal “had to decide that they’d rather petrol fields in Bangladesh and 10% interest get the merger done” than contest the FTC, in an oil consortium in Azerbaijan. However, says Tom Adolph, an IP litigation partner in China’s state-controlled National Offshore Oil Houston’s Jackson, Walker. He says that, Corporation was also out shopping and got the agreement notwithstanding, Chevron may very interested in Unocal assets, as did do further research on RFG, develop a better Tom Adolph Italy’s Eni SpA. News accounts from 2005 technology and patent those results. Partner with Houston's focused mainly on Unocal’s overseas Chevron Chief Patent Counsel Keith Jackson, Walker oilfields, but several stories also mentioned Turner declined to comment for this story. In the RFG patents as an attractive asset for the past, however, he has said that his More Chevron any would-be acquirer. company is not as interested in using research possible The Chinese company made a US$16.5 technology to wall off competitors as other billion bid for Unocal, which raised all kinds oil companies have been. So it remains to of ire in the US. Members of Congress be seen what sort of Chevron patenting expressed worries about potential hikes in activity will arise around reformulated petrol. oil prices should China acquire Unocal and David Hayes heads the IP practice at Palo then keep all the oil supply for its own use. Alto, California’s Fenwick & West, a Silicon Rumblings about China’s haphazard IP Valley powerhouse. He says he spends an enforcement and spotty human rights increasing amount of his time advising clients records doomed the sale, with Congress about working with standards bodies. “It’s all threatening to invoke the Defense Protection sort of a chess game, really,” he says. “You Act to evaluate possible economic and want to be in there to make sure somebody security risks. else’s technology doesn’t become the sole Ultimately, Chevron came out on top, standard and you get shut out.” winning Unocal with a US$18 billion bid. As These days, Hayes continues, most a result of the purchase, Chevron now has a standards groups have an upfront IP policy Eric Prager daily production capacity of 3 million barrels requiring all participants to disclose whether Partner at Darby & Darby of oil and is also the second largest US they have patents or other IP rights to the refiner after Exxon Mobil. standards that ultimately issue. “There’s Few companies Along with the oil fields, Chevron plenty of notice. You join, knowing what acquired about 1,120 issued US patents and you’re getting into, and you have to weigh sophisticated another 350 pending applications from that up front.” about standards Unocal. However, the RFG patents were not A participant whose patents read directly included in the transaction. on the standard is generally required to grant licences to all at a reasonable royalty rate. Condition of sale Staying out of the body will give the patent – Instead, as a condition for the FTC’s approval owner an opportunity to pick and choose of the sale, Chevron had to agree not to among potential licensees and charge a assert or enforce the patents. In a statement higher royalty. released in June 2005, the FTC said the In any case, getting involved in a petrol patents were the “only potential standards body is an expensive choice, says competitive concern” with Chevron’s Eric Prager, a partner in the Seattle office of acquisition of Unocal. The Commission Darby & Darby. “It may require a relatively acknowledged that the monopolisation charge senior attorney in-house working full time, or against Unocal was complex and “could have a lot of work by outside counsel.” He says taken years to resolve”. Meanwhile, continued he’s found “relatively few companies that are enforcement of the patents could potentially sophisticated about the values and risks of cost consumers US$500 million per year and participating in a standards-setting body”. Chevron’s ownership of the patents could have resulted “in even greater competitive harm to downstream consumers”. The FTC’s consent order, finalised in July 2005, required that the remaining terms in [email protected]

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