The Cost of “Clean Gas”
FTC investigates patent scam.


Just when it appeared that corporate America was cleaning up its act, the Federal Trade Commission (FTC) has added Unocal to the dishonor roll of corporations who deceived American consumers and government regulators to pad their bottom lines.

Last month, the FTC accused Union Oil of California (Unocal) of engaging in fraud and anti-competitive behavior by illegally securing patents that gave the El Segundo-based oil giant a stranglehold on a formula for cleaner-burning gasoline. The company is the ninth largest in the world, with annual revenues of $5.2 billion.

The patents allow Unocal to collect an additional 5.75 cents from motorists for every gallon of gasoline sold in California and other states that adopted California’s requirement for cleaner-burning fuel.

The FTC said that overturning Unocal’s illegal patents could save California motorists up to $500 million a year in higher pump prices. Estimates for the cost to consumers in other states were not available, but a highly placed FTC source estimated the patents would allow Unocal to collect a total windfall of more than $1.5 billion a year.

After its unanimous vote, the FTC filed an administrative complaint against Unocal asking for a cease-and-desist order preventing the firm from pursuing legal action to collect royalty payments on the patents.

Unocal’s patents on clean-burning gasoline have been under attack by consumer groups and other oil companies since the company declared their existence in early 1995. It secretly obtained the patents while it was working with other oil companies and the California Air Resources Board (CARB) from 1990 to 1994 to develop an acceptable state standard for reformulated gasoline.

As the panelists neared a final standard, Unocal’s lawyers secured patents on a number of similar formulations that allowed the corporation to claim royalties on all brands of gasoline that were required to meet the California rules.

In its complaint, the FTC charged that Unocal “obtained unlawful market power though affirmative misrepresentations, materially false and misleading statements, and other bad-faith deceptive conduct that caused the California Air Resource Board to enact regulations that overlapped almost entirely with Unocal’s pending patent rights.”

Although some oil companies have refused to pay the royalties demanded by Unocal, others have paid; they will likely be reimbursed if the FTC’s decision stands.

It bears noting that the royalties were not for any value added, but simply a tribute to Unocal’s shrewd manipulation of California clean-fuel regulations and the U.S. patent system. This was an unprecedented — and audacious — maneuver by a company that once enjoyed a sterling reputation as Union Oil of California. Ironically, Unocal is mostly an overseas refiner and no longer directly markets gasoline in the U.S.

The concept driving the public-private panel that Unocal and the oil companies sat on was simple. Its members would work together to arrive at a single California standard for the so-called reformulated gasoline (RFG) required by federal law as part of air-quality improvement programs. Instead of each refiner or oil company producing slightly different mixes of RFG — which would entail higher prices and supply difficulties — the idea was to agree upon a single formula, or “recipe” for RFG that would satisfy the regulatory requirement.

The CARB panel was not trying to come up with a new type of fuel or additive, but simply to mutually agree on a common formula for a mix of already well-known additives and refining processes.

Unocal deserves more than a wrist slap for its behavior in this unprecedented consumer rip-off. It deceived not only California consumers and regulators, but also other members of its industry who were making a good-faith effort to clean up the environment in a cost-effective way and who, unlike Unocal, weren’t trying to manipulate the regulatory process for extra profit.

Unocal deserves to have its name inscribed on the wall of shame, along with Enron, Adelphia, and Tyco International, among others. Hopefully, the FTC’s action in this case will prove decisive and deter other corporations from similar action — and save American drivers some money this summer.

Americans have enough anxiety on their minds these days without having to worry about being gouged an extra dollar or two every time they pump gas.

Eric Peters is a Washington, D.C.-based automotive writer and the autos columnist for America Online, Netscape, and CompuServe.


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