[Federal Register Volume 70, Number 117 (Monday, June 20, 2005)]
[Notices]
[Pages 35434-35437]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-12043]


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FEDERAL TRADE COMMISSION

[Docket No. 9305]


Union Oil Company of California; Analysis of Proposed Consent 
Order to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the complaint and 
the terms of the consent order--embodied in the consent agreement--that 
would settle these allegations.

DATES: Comments must be received on or before July 9, 2005.

ADDRESSES: Interested parties are invited to submit written comments. 
Comments should refer to ``Union Oil Company of California, Docket No. 
9305,'' to facilitate the organization of comments. A comment filed in 
paper form should include this reference both in the text and on the 
envelope, and should be mailed or delivered to the following address: 
Federal Trade Commission/Office of the Secretary, Room 159-H, 600 
Pennsylvania Avenue, NW., Washington, D.C. 20580. Comments containing 
confidential material must be filed in paper form, must be clearly 
labeled ``Confidential,'' and must comply with Commission Rule 4.9(c). 
16 CFR 4.9(c) (2005).\1\ The FTC is requesting that any comment filed 
in paper form be sent by courier or overnight service, if possible, 
because U.S. postal mail in the Washington area and at the Commission 
is subject to delay due to heightened security precautions. Comments 
that do not contain any nonpublic information may instead be filed in 
electronic form as part of or as an attachment to email messages 
directed to the following email box: [email protected].
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    \1\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See Commission Rule 4.9(c), 
16 CFR 4.9(c).
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    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. All timely and responsive public comments, whether filed 
in paper or electronic form, will be considered by the Commission, and 
will be available to the public on the FTC Web site, to the extent 
practicable, at www.ftc.gov. As a matter of discretion, the FTC makes 
every effort to remove home contact information for individuals from 
the public comments it receives before placing those comments on the 
FTC website. More information, including routine uses permitted by the 
Privacy Act, may be found in the FTC's privacy policy, at http://www.ftc.gov/ftc/privacy.htm.

FOR FURTHER INFORMATION CONTACT: Chong S. Park, Bureau of Competition, 
600 Pennsylvania Avenue, NW, Washington, D.C. 20580, (202) 326-2372.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46(f), and Sec.  3.25(f) 
of the Commission Rules of Practice, 16 CFR 3.25(f), notice is hereby 
given that the above-captioned consent agreement containing a consent 
order to cease and desist, having been filed with and accepted, subject 
to final approval, by the Commission, has been placed on the public 
record for a period of thirty (30) days. The following Analysis to Aid 
Public Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC Home Page 
(for June 10, 2005), on the World Wide Web, at http://www.ftc.gov/os/2005/06/index.htm. A paper copy can be obtained from the FTC Public

[[Page 35435]]

Reference Room, Room 130-H, 600 Pennsylvania Avenue, NW., Washington, 
DC 20580, either in person or by calling (202) 326-2222.
    Public comments are invited, and may be filed with the Commission 
in either paper or electronic form. All comments should be filed as 
prescribed in the ADDRESSES section above, and must be received on or 
before the date specified in the DATES section.

Analysis of Agreement Containing Consent Order to Aid Public Comment

    The Federal Trade Commission has accepted for public comment an 
Agreement Containing Consent Order (``Agreement'') with Union Oil 
Company of California (``Union Oil'') to resolve matters charged in an 
Administrative Complaint issued by the Commission on March 4, 2003 
(``Complaint''). Pursuant to the Agreement, Union Oil provisionally has 
agreed to be bound by a proposed consent order (``Proposed Consent 
Order'').
    The Agreement has been placed on the public record for thirty (30) 
days for receipt of comments from interested members of the public. The 
Agreement is for settlement purposes only and does not constitute an 
admission by Union Oil that the law has been violated as alleged in the 
Complaint or that the facts alleged in the Complaint, other than 
jurisdictional facts, are true. The Proposed Consent Order remedies 
alleged anticompetitive effects arising from Union Oil's conduct, as 
alleged in the Complaint.

I. The Commission's Complaint

    The Complaint alleges that Respondent Union Oil engaged in a series 
of acts to subvert state regulatory standard-setting procedures 
relating to low emissions gasoline. To address California's serious air 
pollution problems, the California Air Resources Board (``CARB'') 
initiated proceedings in the late 1980s to set regulations and 
standards governing the composition of low emissions, reformulated 
gasoline (``RFG''). The Complaint alleges that Union Oil actively 
participated in CARB RFG rulemaking proceedings and engaged in a 
pattern of bad-faith, deceptive conduct, exclusionary in nature, that 
enabled it to undermine competition and harm consumers. The Complaint 
states that Union Oil also engaged in deceptive and exclusionary 
conduct through its participation in two private industry groups--the 
Auto/Oil Air Quality Improvement Program (``Auto/Oil'') and the Western 
States Petroleum Association (``WSPA''). According to the Complaint, 
Union Oil thereby illegally monopolized, attempted to monopolize, and 
otherwise engaged in unfair methods of competition in violation of 
Section 5 of the FTC Act in both the technology market for the 
production and supply of CARB-compliant ``summer-time'' gasoline, and 
the downstream ``summer-time'' gasoline product market.
    Union Oil is a public corporation, organized in, and doing business 
under, the laws of California. Union Oil is a wholly-owned operating 
subsidiary of Unocal Corporation, a holding company incorporated in 
Delaware. Prior to 1997, Union Oil owned and operated refineries in 
California as a vertically-integrated producer, refiner, and marketer 
of petroleum products. In 1997, Union Oil sold its west coast refining, 
marketing, and transportation assets. Currently, Union Oil's primary 
business activities involve oil and gas exploration and production.
    The Complaint alleges that during the CARB ``Phase 2'' RFG 
rulemaking proceedings in 1990-1994, Union Oil made a series of 
materially false and misleading statements. According to the 
allegations in the Complaint, Union Oil willfully and intentionally:
    a. Represented to CARB and other participants that Union Oil's 
emissions research results showing, inter alia, the relationships 
between certain gasoline properties and automobile emissions, were 
``nonproprietary,'' in ``the public domain,'' or otherwise were 
available to CARB, industry members, and the general public--without 
disclosing that Union Oil intended to assert its proprietary interests 
(as manifested in pending patent claims) in the results of this 
research;
    b. Represented to CARB that a ``predictive model''--i.e., a 
mathematical model that predicts whether the emissions that would 
result from varying certain gasoline properties in a fuel are 
equivalent to the emissions resulting from a specified and fixed fuel 
formulation--would be ``cost-effective'' and ``flexible,'' without 
disclosing that Union Oil's assertion of its proprietary interests 
would undermine the cost-effectiveness and flexibility of such a model; 
and
    c. Made statements and comments to CARB and other industry 
participants relating to the cost-effectiveness and flexibility of the 
regulations that further reinforced the materially false and misleading 
impression that Union Oil had relinquished or would not enforce any 
proprietary interests in its emissions research results.
    According to the Complaint, Union Oil continued to conceal its 
intention to obtain a competitive advantage through the enforcement of 
its proprietary interests relating to RFG even after Union Oil received 
notice that the pending patent claims were allowed and issued. The 
Complaint alleges that Union Oil thereby led CARB and two private 
industry groups--Auto/Oil and WSPA (and their respective industry 
members)--to believe that Union Oil did not have, or would not enforce, 
any proprietary interests or intellectual property rights associated 
with its emissions research results.
    The Complaint alleges that Union Oil's conduct caused CARB to adopt 
Phase 2 ``summer-time'' RFG regulations that substantially overlapped 
with Union Oil's concealed pending patent claims. But for Union Oil's 
deception, according to the Complaint, CARB would not have adopted RFG 
regulations substantially incorporating Union Oil's proprietary 
interests; the terms on which Union Oil was later able to enforce its 
proprietary interests would have been substantially different; or both.
    The Complaint alleges that but for Union Oil's deceptive conduct, 
industry participants in Auto/Oil and WSPA would have taken actions 
including, but not limited to, (a) advocating that CARB adopt 
regulations that minimized or avoided infringement of Union Oil's 
patent claims; (b) advocating that CARB negotiate license terms 
substantially different from those that Union Oil was later able to 
obtain; and/or (c) incorporating knowledge of Union Oil's pending 
patent rights in their capital investment and refinery reconfiguration 
decisions to avoid and/or minimize potential infringement.
    According to the Complaint, Union Oil did not announce the 
existence of its proprietary interests and patent rights relating to 
RFG until January 1995--shortly before the relevant CARB Phase 2 RFG 
regulations were to go into effect. The Complaint alleges that, by that 
time, the refining industry had spent billions of dollars in capital 
expenditures to modify their refineries to comply with the CARB Phase 2 
RFG regulations, in reliance on Union Oil's representations that its 
research results were in ``the public domain.'' The Complaint states 
that once CARB and the refiners had become locked into the Phase 2 
regulations, Union Oil commenced vigorous enforcement of its patent 
rights through litigation and licensing, and obtained four additional 
patents based on the same RFG research results.
    Union Oil's misrepresentations, according to the Complaint, have 
harmed competition and led directly to the acquisition of monopoly 
power for the technology to produce and supply

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California ``summer-time'' reformulated gasoline (mandated for up to 
eight months of the year, from approximately March through October). 
The Complaint alleges that Union Oil's conduct also permitted it to 
undermine competition and harm consumers in the downstream product 
market for ``summer-time'' reformulated gasoline in California. The 
Complaint alleges that without recourse, Union Oil's conduct would 
continue materially to cause or threaten to cause further substantial 
injury to competition and to consumers.
    According to the Complaint, Union Oil's enforcement of its RFG 
patents has resulted, inter alia, in a jury determination of a 5.75 
cents per gallon royalty on gasoline produced by major California 
refiners comprising approximately 90 percent of the current refining 
capacity of CARB-compliant RFG in the California market. The Complaint 
alleges that Union Oil also has publicly announced that it will license 
its RFG patent portfolio, with fees ranging from 1.2 to 3.4 cents per 
gallon, to ``non-litigating'' refiners.
    The Complaint alleges that Unocal's conduct could result in an 
estimated annual cost of more than $500 million to the refining 
industry. According to the Complaint, Union Oil's own economic expert 
has testified under oath that 90 percent of any royalty would be passed 
through to consumers in the form of higher gasoline prices.

II. Terms of the Proposed Consent Order

    The Commission has provisionally entered into an Agreement with 
Union Oil in settlement of the Complaint. As discussed below, the 
provisions of the Agreement are conditioned upon the completion of 
certain steps in Chevron Corporation's merger with Unocal Corporation, 
as contemplated by the Agreement and Plan of Merger dated as of April 
4, 2005, among Unocal Corporation, ChevronTexaco Corporation, and Blue 
Merger Sub Inc.
    In order to remedy the alleged anticompetitive effects, Union Oil 
has agreed to take several actions. First, it will cease and desist 
from any and all efforts, and will not undertake any new efforts to: 
(a) Assert or enforce any of Union Oil's Relevant U.S. Patents against 
any person; (b) recover any damages or costs for alleged infringements 
of any of the Relevant U.S. Patents; or (c) collect any fees, royalties 
or other payments, in cash or in kind, for the practice of any of the 
Relevant U.S. Patents, including but not limited to fees, royalties, or 
other payments, in cash or in kind, to be collected pursuant to any 
License Agreement. These obligations become effective as of the 
``Merger Effective Date,'' which is defined as the earlier of (1) the 
date that the certificate of merger for the Merger is filed with the 
Secretary of State of Delaware or such later time as specified in such 
certificate of merger, or (2) the date that Chevron Corporation 
acquires control of Unocal Corporation, as ``control'' is defined by 16 
CFR 801.1(b).
    Second, the Proposed Consent Order requires that, within thirty 
(30) days following the Merger Effective Date, Union Oil shall file, or 
cause to be filed, with the United States Patent and Trademark Office, 
the necessary documents pursuant to 35 U.S.C. 253, 37 CFR 1.321, and 
the Manual of Patent Examining Procedure to disclaim or dedicate to the 
public the remaining term of the Relevant U.S. Patents. The Proposed 
Consent Order further requires that Union Oil shall correct as 
necessary, and shall not withdraw or seek to nullify, any disclaimers 
or dedications filed pursuant to the Proposed Consent Order.
    Third, the Proposed Consent Order requires that, within thirty (30) 
days following the Merger Effective Date, Union Oil shall move to 
dismiss, with prejudice, all pending legal actions relating to the 
alleged infringement of any Relevant U.S. Patents, including but not 
limited to the following actions pending in the United States District 
Court for the Central District of California: Union Oil Company of 
California v. Atlantic Richfield Company, et al., Case No. CV-95-2379-
CAS and Union Oil Company of California v. Valero Energy Corporation, 
Case No. CV-02-00593 SVW.
    Paragraph V of the Proposed Consent Order requires Union Oil to 
distribute a copy of the Proposed Consent Order and the Complaint in 
this matter to certain interested parties, including (1) any person 
that Union Oil has contacted regarding possible infringement of any of 
the Relevant U.S. Patents, (2) any person against which Union Oil is, 
or was, involved in any legal action regarding possible infringement of 
any of the Relevant U.S. Patents, (3) any licensee or other Person from 
which Union Oil has collected any fees, royalties or other payments, in 
cash or in kind, for the practice of the Relevant U.S. Patents, and (4) 
any person that Union Oil has contacted with regard to the possible 
collection of any fees, royalties or other payments, in cash or in 
kind, for the practice of the Relevant U.S. Patents.
    Paragraph V also requires Union Oil to distribute a copy of the 
Proposed Consent Order and the Complaint to Union Oil's present and 
future officers and directors having responsibility for any of its 
obligations under the Proposed Consent Order, and to employees and 
agents having managerial responsibility for any of its obligations 
under the Proposed Consent Order.
    Paragraphs VI, VII and VIII of the Proposed Consent Order contain 
standard reporting, access, and notification provisions designed to 
allow the Commission to monitor compliance with the order. Paragraph IX 
provides that the Proposed Consent Order shall terminate twenty (20) 
years after the date it becomes final.

III. Opportunity for Public Comment

    The Proposed Consent Order has been placed on the public record for 
thirty (30) days for receipt of comments by interested persons. 
Comments received during this thirty-day comment period will become 
part of the public record. After thirty (30) days, the Commission will 
again review the Proposed Consent Order and the comments received and 
will decide whether it should withdraw from the Proposed Consent Order 
or make final the Agreement's Proposed Consent Order.
    By accepting the Proposed Consent Order subject to final approval, 
the Commission anticipates that the competitive problems alleged in the 
Complaint will be resolved. The purpose of this analysis is to invite 
public comment on the Proposed Consent Order, and to aid the Commission 
in its determination of whether it should make final the Proposed 
Consent Order contained in the Agreement. This analysis is not intended 
to constitute an official interpretation of the Proposed Consent Order, 
nor is it intended to modify the terms of the Proposed Consent Order in 
any way.

Statement of the Federal Trade Commission

    The Federal Trade Commission has voted unanimously (4-0-1, with 
Chairman Majoras recused) to accept two linked consent agreements that 
resolve both the Commission's monopolization case against Unocal 
Corporation's subsidiary Union Oil Company of California and any 
antitrust concerns arising from Chevron Corporation's pending 
acquisition of Unocal. The key element in the settlements, which will 
become effective when the acquisition is completed, is Chevron's 
agreement not to enforce certain Union Oil patents that potentially 
could have increased gasoline prices in California by over

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$500 million a year (or almost six cents per gallon). This agreement 
provides the full relief that the Commission sought in its 
administrative litigation with Union Oil and also addresses the only 
possible objection to the Chevron/Unocal acquisition.
    On April 4, 2005, Chevron agreed to acquire Unocal in a transaction 
valued at approximately $18 billion. Chevron and Unocal both have 
extensive oil and gas operations. However, nearly all of Unocal's 
operations are in the so-called ``upstream'' segment of the business--
namely, the exploration and production of crude oil and natural gas. 
Unocal has no refineries or gasoline stations in the United States or 
anywhere else in the world, and has few other ``downstream'' 
operations. As a result, virtually all of the competitive overlaps 
between the two firms are in unconcentrated upstream markets, and the 
merger thus creates no competitive risk. For example, Chevron and 
Unocal combined have only 2.7 percent of world crude oil production, 
0.77 percent of world crude oil reserves, 11.3 percent of U.S. crude 
oil production, and 11.4 percent of U.S. crude oil reserves.\2\ We want 
to emphasize that the merger will have no impact whatsoever on 
concentration at the retail or refinery levels. It is clear from all we 
have seen that Chevron's primary motivation is to gain access to 
Unocal's upstream oil reserves.
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    \2\ Sources for the underlying data include the Energy 
Information Administration, U.S. Department of Energy, U.S. Crude 
Oil, Natural Gas, and Liquids Table 2003 Annual Report, Table B5, 
available at http://www.eia.doe.gov, the FTC Bureau of Economics 
Staff Study, ``The Petroleum Industry: Mergers, Structural Change, 
and Antitrust Enforcement,'' August 2004, Table 5-3, available at 
http://www.ftc.gov/os/2004/08/040813/mergersinpetrolberpt.pdf, and 
the Oil and Gas Journal.
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    The only potential competitive concern with Chevron's proposed 
acquisition of Unocal involved patents held by Union Oil--the same 
group of patents involved in the Commission's monopolization case 
against Union Oil. In order to explain why this is so, it is necessary 
first to discuss the issues in this monopolization case.
    The Commission's administrative complaint against Union Oil charged 
that the firm had illegally acquired monopoly power in the technology 
market for producing certain low-emission gasoline mandated by the 
California Air Resources Board (CARB) for sale and use in California 
for up to eight months of the year. According to the complaint, Union 
Oil misrepresented to CARB that certain gasoline research was non-
proprietary and in the public domain, while at the same time it pursued 
a patent that would enable it to charge substantial royalties if the 
research results were used by CARB in the development of regulations. 
The complaint further asserted that Union Oil similarly misled its 
fellow members of private industry groups, which were also 
participating in the CARB rulemaking process. As a result, if Union Oil 
were permitted to enforce its patent rights, companies producing this 
low-emission CARB gasoline would be required to pay royalties to Union 
Oil, the bulk of which would be passed on to California consumers in 
the form of higher gasoline prices. The Commission estimated that Union 
Oil's enforcement of these patents could potentially result in over 
$500 million of additional consumer costs each year. The complaint 
sought an order requiring Union Oil to cease and desist from all 
efforts to assert these patents against those manufacturing, selling, 
distributing, or otherwise using motor gasoline to be sold in 
California. In the settlement announced today, Unocal and Chevron have 
agreed to all of this requested relief.
    The consent orders also resolve any possible antitrust objections 
to the merger. Although Unocal does not engage in any refining or 
retailing itself, it had claimed the right to collect patent royalties 
from companies that did so (including Chevron). If Chevron had 
unconditionally inherited these patents by acquisition, it would have 
been in a position to obtain sensitive information and to claim 
royalties from its own horizontal downstream competitors. We have 
reason to believe that this scenario would likely have an adverse 
effect on competition and, in any event, would inevitably have required 
an extensive inquiry and possible litigation.
    For example, Union Oil regularly collects detailed reports from 
licensees about their production of CARB gasoline and other refinery 
operations. If Chevron had continued these license agreements after 
inheriting Union Oil's patents, it would have received information not 
otherwise available to members of the industry. Chevron could have used 
this information to facilitate coordinated interaction and detect any 
deviations. Chevron might also have been able use the patents to 
discourage maverick behavior. Our present knowledge suggests that the 
likely competitive harm from this potential coordination and discipline 
would outweigh any likely efficiency gains from the vertical 
integration of a merged Chevron-Unocal. Now, a further inquiry into 
that belief is not necessary.
    The settlement of these two matters is thus a double victory for 
California consumers. The Commission's monopolization case against 
Unocal was complex and, with possible appeals, could have taken years 
to resolve. The stakes were high, and substantial royalties could have 
been paid in the meantime--with an immediate impact on consumers. If 
the Commission lost the case, the dollar costs to consumers ultimately 
would have been immense. At the same time, a challenge against the 
acquisition of Unocal by Chevron would itself be a complex case, with 
high stakes and an uncertain outcome. The settlement provides the full 
relief sought in the monopolization case and resolves the only 
competitive issue with the proposed merger. With the settlement, 
consumers will benefit immediately from the elimination of royalty 
payments on the Union Oil patents, and potential merger efficiencies 
could result in additional savings at the pump.

    By direction of the Commission, Chairman Majoras recused.
Donald S. Clark,
Secretary.
[FR Doc. 05-12043 Filed 6-17-05; 8:45 am]
BILLING CODE 6750-01-P