FUEL FOR THOUGHT: CLEAN GASOLINE AND DIRTY PATENTS

SCOTT H. SEGAL

INTRODUCTION

One of the most successful air pollution control programs devised for use in the United States is the federal reformulated gasoline (RFG) program. By operation of law, the RFG Program applies to the nine smoggiest ozone non-attainment areas, as are defined under the law and regulations of the Clean Air Act. The secret of the success of this program is the careful balance it draws between environmental protection and cost effectiveness. Because RFG dcompoes not require changes in automotive technology to be effective, and the changes in price that RFG necessitated have typically been modest, the program has been implemented with a large measure of consumer acceptability. Other controls on mobile source pollution are more problematic and may force more intrusive changes in consumer behavior. However, when the Court of Appeals for the Federal Circuit recently upheld a challenge to patents on RFG held by the Unocal Corporation, this careful balance of the RFG program was undermined. Appropriate actions must be taken to vindicate environmental, energy, regulatory, and national security policy goals, while being mindful of important intellectual property protections afforded in the United States. This Article will first examine the background of the RFG program and the Unocal patent case. The Article will then attempt to place the Unocal case in the general context of the current sweep of changes in intellectual property. Thereafter, this Article will examine the conflicts the Unocal case presents with other important public policy objectives, such as environmental, energy, regulatory and national security policy. Finally, the Article will examine potential solutions to the problems presented by the Unocal patent case.

1. BACKGROUND OF THE FEDERAL REFORMULATED GASOLINE PROGRAM

Air pollution and air pollution controls have a varied history in the United States. The first air pollution control laws were implemented in Chicago and Cincinnati in 1881 and by 1912 twenty-three of the twenty-eight largest U.S. cities enacted similar laws. Despite the early adoption of laws intended to limit pollution, by the 1950s a public outcry erupted against the ever-growing air pollution. In 1948, in Donora, Pennsylvania twenty people died from air pollution. The deaths and illnesses in Donora led to the initiation of research into the causes and effects of air pollution by the Department of Health, Education, and Welfare, thus beginning the federal government's involvement with monitoring air pollution. Despite public interest and activity by Congress and the Executive branch, primary enforcement was essentially a matter of local ordinance. The federal government's first attempt to regulate air pollution began with the Clean Air Act of 1963. The Act gave the government limited enforcement abilities to decrease air pollution only when the actions were first approved by the local or state entities. Clearly, stationary source controls could not provide a comprehensive answer. Federal government actors, therefore, turned their attention to mobile sources, albeit initially in a limited fashion. The 1965 Clean Air Act Amendments regulated vehicle emissions with an emphasis on the economic and technical feasibility of compliance. The Clean Air Act of 1970 required a ninety percent reduction in the emission of hydrocarbons, carbon monoxide, and nitrogen oxide by 1975. The law also changed the chemical composition of gasoline for the first time. Unfortunately, these regulations were not enforced by the new Environmental Protection Agency (EPA) and by 1989 mobile sources were the largest single source of air pollution in the United States. The state of California was one of the first states to regulate mobile sources of air pollution. As early as 1947, California adopted its first air pollution controls. By 1960, California was making its first attempts to regulate automobile emissions. Under the federal system, states are required to enact specific State Implementation Plans in order to ensure compliance with federal ambient air quality standards. In California, this obligation is discharged between the California Air Resources Board and local air pollution control districts. California is the only state that retains a degree of autonomy and flexibility under the Clean Air Act system to pursue regulations differing from the federal norm "for the purpose of motor vehicle emission control." The Clean Air Act Amendments of 1990 required the EPA to devise regulations regarding the makeup of gasoline. The impetus for the amendments of 1990 was fourfold: "America's increasing dependence on foreign oil, increasing awareness of the large role motor fuel emissions play in the formation of air pollution, interest from agricultural groups, and a desire on the part of Congress to 'do more than the Administration.'" The legislation contained broad outlines for the RFG Program: limits on heavy metals, a minimum oxygen content, and various performance characteristics. Details were left to the EPA. As will be discussed further, the EPA developed a Regulatory Negotiation (Reg-Neg) process that invited all interested and effected parties to participate in the drafting of requirements for the RFG program. In 1994, the EPA published its RFG Final Rule. By any measure, the RFG Program has been an environmental success. The RFG Program reduced benzene and limited aromatics and added larger quantities of oxygenates (principally ethanol and MTBE) to gasoline. The program was implemented on January 1, 1995, for all cities labeled "severe" or higher as "nonattainment" areas. Nonattainment areas were cities that had failed to meet national ambient air quality standards (NAAQS) due to their high levels of ozone, carbon monoxide (CO), particulate matter (PM), sulfur dioxide, nitrogen dioxide (NOx), and lead. The initial areas were Baltimore, Chicago, Greater Hartford, Houston, Los Angeles, Milwaukee, New York, Philadelphia, and San Diego. The composition of the reformulated gasoline was designed to decrease or eliminate harmful pollutants, and the RFG Program contained provisions that allowed oil companies to determine the most appropriate methods for achieving these targets. In doing so, the RFG Program created an innovation incentive and provided the oil companies with the ability to meet these requirements as economically as possible. The RFG Program also provided a deterrent in a $25,000 per day fine for violation of its provisions. Finally, the EPA devised two means of certifying reformulated gasoline. The "simple" model was based on certain parameters that are clearly known to effect emissions and can be computed for a quick estimate of the emissions they will produce. The succeeding "complex" model was computer generated and based on the relationship between levels of fuel parameters and emissions using data from years of testing. The evolution of environmental protections in the United States demonstrates the increasing levels of pollutants in the air and the country's increasing attention to the threats that these pollutants pose. While plagued through most of its history with lax enforcement and a lack of federal oversight, the implementation of new Clean Air Act regulations and the creation of the Environmental Protection Agency within the last thirty years has resulted in a concerted effort to fight vehicle emissions and air pollution generally.

1. AN EXPLANATION OF THE UNOCAL PATENT CASE

The State of California's Activities

As discussed above, it is clear that mobile sources have become an increasingly intractable part of air pollution in the United States today. Nowhere has this been more apparent than in the state of California. The prototypical example of intense air pollution is the Los Angeles air basin. In 1988, the California legislature tasked the California Air Resources Board (CARB) with the duty "to achieve the maximum degree of emission reduction possible from vehicular and other mobile sources in order to accomplish attainment of the state ambient air quality standards at the earliest practicable date." The technical challenges presented by mobile source controls were formidable, such that CARB initiated a consensus-building technical proceeding with stakeholders in order to devise feasible clean fuel standards that could be implemented in a cost-effective way. In order to facilitate the regulatory process in California, a primary participant in the California proceeding was the Auto/Oil Air Quality Improvement Research Program (Auto/Oil Group), a cooperative research group of the three major auto manufacturers and fourteen major petroleum refining companies. The Auto/Oil Group was formed in 1989, in order to work on the development of RFG and to share research results towards that common end. The Auto/Oil Cooperative Agreement, signed in October of that year, made explicit the pledge that results of the effort would be made public and that no participant would claim such results as proprietary. In part, the Agreement stated that, "No proprietary rights will be sought nor patent applications prosecuted on the basis of the work of the Program unless required for the purpose of ensuring that the results of the research by the Program will be freely available, without royalty, in the public domain." In August 1990, CARB issued the "Phase I" RFG regulations, which became effective starting in 1992. These regulations imposed limits on a discrete set of fuel parameters, including Reid vapor pressure (RVP) at 7.8 psi. CARB adopted limited parameters in this initial phase only because it did not possess the full range of data necessary to make final adjustments to fuel specifications, and the fuel did not require the degree of capital investment that would ultimately be required in the Program's second phase. At the time of the CARB proceedings, Unocal researchers were conducting screening analyses with the intention of clarifying the relationships between certain gasoline parameters and actual tailpipe emissions. The work was an attempt to correlate very well-known gasoline properties, such as RVP, chemical compositions and distillation, to specific emissions, specifically CO, NOx, and total hydrocarbons. Unocal researchers specifically believed that a particular distillation temperature was a key predictor of CO and hydrocarbons. This Unocal research, which the corporation intended as proprietary, was then apparently used to influence CARB in the manner specifically envisioned by the cooperative relationship described in the Auto/Oil agreement. Indeed, one of the lead Unocal research scientists wrote to his senior management in November 1990 informing them of the urgency involved in using the information they had gained through their research to yield competitive advantages in the marketplace and to influence CARB in its development of regulation. The Unocal researcher candidly observed that several of the other Auto/Oil participants previously discovered the significance of the distillation relationship, and that CARB was on the verge of taking action of its own accord. Unocal researchers continued to develop strategy for Unocal management that involved concealment of proprietary interest coupled with continued participation in the cooperative effort underway with regard to the CARB proceedings. They advised that it would be in Unocal's best interest to work closely with the EPA and CARB to shape regulations. Specifically, Unocal researchers warned that Unocal must "retain secrecy of data" while "leaving the door open for" the company to secure a "competitive advantage" based on the distillation factors as an RFG parameter. If the competitive advantage in question should manifest itself in "licensing agreements with competitors," they reasoned, the patents "could be worth 10's of millions of dollars every year, far more than any other competitive advantage could yield." On December 13, 1990, Unocal filed its initial patent application with the U.S. Patent and Trademark Office. The application described relationships between gasoline parameters and emissions control in directional and qualitative ways. Because the patent application describes ranges of parameters, rather than specific numbers, the patent lends itself to innumerable possible permutations among the various parameters. With such a range of permutations encompassed within the patent application, it is clear that the patent was an attempt to "mix and match" final parameters in order to track the result ultimately to be mandated by CARB. Indeed, Unocal's patent set an olefin limit that captured all formulations below fifteen percent, which was CARB's limit already. Further, CARB's already applicable RVP limit was 7.8 psi; the Unocal approach attempted to patent RVP parameters below 8 psi. It is apparent that throughout 1991 CARB met with Unocal at the company's request. Specifically, Unocal advocated the use of predictive models. CARB never knew that Unocal's position was based upon proprietary data, and was significantly distressed when news of the patent came to light later. On August 17, 1991, Unocal again appeared to accept this premise. Unocal's Manager of Planning wrote to CARB, "[p]lease be advised that Unocal now considers this data to be nonproprietary and available to CARB, environmental interest groups, other members of the petroleum industry, and the general public upon request." It is a small wonder, then, that CARB and others were surprised to learn of Unocal's patent gambit given its representations, its participation in the Auto/Oil Agreement, and its membership in relevant trade associations. The significance of Unocal's public persona of civic-mindedness and lack of proprietary interest cannot be overstated in reference to the actions of CARB. In order to determine which fuel parameters are cost-effective as the premise for regulation, CARB had to have a realistic view of the actual costs associated with the mandates. In addition, the environmental results themselves are subject to some speculation in the sense that minor alterations in parameters may not result in substantial differences in environmental performance. Therefore, establishing bright lines in environmental policy can often be usefully described as "more art than science," even by experts. In light of this uncertainty, it may be reasonable to assume that if CARB had known of the true consequences of its actions with regard to potential intellectual property concerns, it might have adopted slightly different standards. Unocal participated in the formulation of cost-effective conclusions with CARB directly and through its participation in broader industry efforts. It is difficult to understand how Unocal could have been supplying relevant cost information in good faith and at the same time failing to disclose its patent applications. The President of Unocal Refining Roger C. Beach wrote to the Chair of CARB in November 1991 stressing Unocal's opposition to regulations that are not cost effective. At the close of its proceeding, CARB adopted Phase II California RFG with specifications for eight specific fuel parameters. Going beyond Phase I federal RFG, the program was anticipated to cost substantial amounts for capital investment in production. Thereafter, CARB began to develop its predictive model. When Phase II California RFG was announced, Unocal began a program to amend its patents in order to better conform with the regulatory standards. Particularly instructive is the cross-examination of a Unocal research team member, Dr. Peter J. Jessup. When asked whether the patent was changed after the CARB regulations came out, Dr. Jessup explained that some claims were narrowed to resemble the regulations, but insisted that they were not copied from the regulations. Indeed, over a period of time, Unocal's conforming amendments captured almost any practicable formulation for meeting the CARB regulations. This is the case even for fuel parameters previously inconsistent with the teaching of the patent. For example, when CARB failed to embrace a zeroing out of olefins in the clean fuel pool (as Unocal had previously recommended), the patent was amended to mirror the higher levels of olefins upon which CARB ultimately settleda directional inconsistency with the original patent's approach. Unocal officials understood the implications for CARB RFG when they made the patent known only after the capital investments and refinery modifications were underway and the patent had been awarded. This fact is clearly indicated by Unocal Spokesman Barry Lane: "[w]e believe that almost any gasoline that would be practical to make and meet the state requirements would fall under the scope of our patent."

Federal Activities

While CARB was underway with its regulatory process to develop clean California fuels, the Environmental Protection Agency (EPA) was in the midst of a similar and related effort under the federal Clean Air Act for ozone nonattainment areas. As discussed above, the RFG program was the result of a confluence of political actions. It had been well-recognized prior to 1990 that so-called tailpipe emissions standards for automobiles (i.e., solutions predicated on changes in automotive technology) would only be a partial solution because "no matter how effective automobile antismog devices became, some portion of the inherent pollution content of gasoline would always exit the tailpipe." While recent notable cases have reinforced the federal Clean Air Act's prohibition against consideration of cost in standard settings, the EPA's statutory authority for the RFG program is notably different, explicitly calling for cost considerations in emission reduction regulations. It is clear that although the primary responsibility of the EPA in establishing standards for RFG pertains to the environmental performance of the program, the EPA can and must take costs, as reflected in gasoline price and supply, into consideration when implementing the program. Indeed, the fuels program is a paradigm case where consumer acceptability of the control is functionally related to the success of the program and to the price of the product. Cost considerations, therefore, serve the broader social interest in the program. Along with considering costs, the EPA had to include fifteen percent reductions in emissions of volatile organic compounds and toxic air pollutants as a measure of Phase I of the federal RFG program (1995-2000), and twenty-five percent reductions thereafter in Phase II, beginning in 2001. In order to meet this schedule and grapple with the significant technical issues at play, the EPA sponsored a regulatory negotiation (Reg-Neg) to bring interested parties together on a cooperative basis. The purpose of the RegNeg was explained by the Congressional Research Service: In the months following enactment of the CAAA, EPA and the other interested parties agreed on a process called a regulatory negotiation, shortened to "reg neg", covering the reformulated gasoline program mandated by the Act. This negotiation was intended to keep the potentially controversial regulations out of the courts, and to avoid future congressional involvement, by obtaining agreement among all interested parties before the regulations were written. EPA would then write the regulations, but this would presumably be a straightforward and noncontroversial task, embodying the principles already agreed to in the negotiated agreement. While the EPA did not have extensive experience with the Reg-Neg process at this time, the concept would be tested by the exigencies of the federal RFG case. After substantial negotiations, a final agreement was reached by August 1991 and signed by all parties. The EPA then revealed its outline of federal RFG regulations in April 1992, based in large measure on the Reg-Neg. The formidable RegNeg process had taken over six months to finish and involved thirty parties, all of whom signed off on the results. The Phase I federal RFG regulations relied upon the so-called "simple model" for establishing baseline compliance, based upon a recipe that included oxygen content, benzene controls, heavy metal and aromatic content, and RVP. By contrast, the more stringent "complex model" for Phase II federal RFG is based upon a complex set of mathematical formulations, based in part on RVP, distillation and olefin levels (among other characteristics). In this respect, it can be said that the Phase II federal RFG is similar in kind and properties to the predictive model used by CARB. The complex model was developed by a process beginning with Reg-Neg, but proceeding through the full range of public participation necessitated by administrative procedure. In 1992 and 1993, the EPA held numerous public workshops on RFG and solicited public comment. In 1994, the EPA adopted its final RFG rules. Again, Unocal participated broadly in the Reg-Neg and rulemaking processes, without disclosure of its patent claims, which led the patents to present as much a problem for the EPA as they did for CARB.

The Unocal Patents

Until this point the only patent discussed has been the '393 patent, because it is already subject to litigation and is most troubling for purposes of the above analysis. However, as Unocal President Roger Beach observed, "Unocal's patents 'may have application throughout the U.S., not just California.'" Indeed, Unocal has several similar patents. Unocal holds five sequential utility patents on various compositions of reformulated gasoline. The filing and issuance dates, as well as the patent numbers, follow: PATENT NUMBER APPLICATION DATE ISSUE DATE 5,288,393 Dec. 13, 1990 Feb. 22, 1994 5,593,567 Mar. 22, 1995 Jan. 14, 1997 5,653,866 June 5, 1995 Aug. 5, 1997 5,837,126 Aug. 1, 1997 Nov. 17, 1998 6,030,521 Nov. 13, 1998 Feb. 29, 2000 Under 35 U.S.C. 154, patents issued before June 8, 1995 are effective for seventeen years. For patent applications received before June 8, 1995 and issued after June 8, 1995, the patent life is either twenty years from the application date or seventeen years from the issue date, whichever time period is longer. Finally, for patents applied for and issued post-June 8, 1995, the patent life is twenty years from the date of application. Even though the '393 patent (granted on February 22, 1994) was the basis of litigation, a second broader patentthe '126 patentwas awarded to Unocal on November 17, 1998. "Taken together," writes noted petroleum economist Philip K. Verleger, "the '393 and the '126 patents may apply to all, or almost all, reformulated and low-RVP gasoline marketed in the United States." The '126 patent is worthy of some independent discussion because it apparently addresses an important shortcoming in the broad '393 patent. The '393 patent ostensibly applies to petroleum refiners, and not to gasoline made outside the factory gate. Because the final formulation of a substantial amount of gasoline occurs at blending operations, a potential loophole exists in the '393 patent because it is silent as to distribution. The '126 patent remedies the potential loophole by including claims regarding blending of more than 50,000 gallons at a time, as well as more general claims regarding product distribution.

Federal Litigation

In 1998, the plaintiffs, "Refiners," sought declaratory judgment against the defendant, Unocal, to invalidate Unocal's '393 patent. Unocal counterclaimed, alleging willful infringement of the '393 patent. The district court converted the Refiners' declaratory judgment action into an infringement defense, and tried the invalidity issues to a jury. The jury answered a special verdict form affirmatively, finding the '393 patent to be valid. The Refiners then moved for Judgment as a Matter of Law (JMOL) to overturn the jury's verdict based on the patent application's anticipation, obviousness, and lack of written description. The district court rejected these arguments. The case was complicated; the original finder of fact considered over 400 trial exhibits and demonstrations and heard testimony from 17 technical witnesses. The trial court's special verdict form asked the jury 222 individual questions. The trial lasted forty-nine days, and the jury deliberated for thirteen days, ultimately finding in favor of the defendant Unocal. In a separate proceeding, the Refiners argued that the patent was unenforceable for inequitable conduct. The district court held that the Refiners did not meet their burden of showing inequitable conduct by clear and convincing evidence. In July 1999, the Refiners appealed the district court's denial of JMOL on anticipation and written description, as well as the district court's inequitable conduct decision, to the Court of Appeals for the Federal Circuit. Finding that the record contained substantial evidence to support the jury's verdict of no anticipation and sufficient written description, the appellate court affirmed the district court's denial of JMOL. Additionally, the appellate court affirmed the district court's inequitable conduct determination. The Refiners appealed the Federal Circuit decision to the U.S. Supreme Court. The Court requested formally that the Solicitor General file an amicus brief stating the opinion of the United States on the certiorari petition. The Solicitor General argued that the case did not present novel issues for the High Court's consideration, and on February 20, 2001, the U.S. Supreme Court denied without comment the Refiners' petition.

1. THE UNOCAL PATENT CASE AND CURRENT TRENDS IN INTELLECTUAL PROPERTY

The Unocal patent case did not take place in a vacuum of intellectual property law or Federal Circuit precedent. Rather, the case can properly be viewed as a troubling example of emerging patent treatment in the Federal Circuit, ever pushing the envelope on what art is legitimately patentable. With the emergence of cutting-edge issues in intellectual property, such as information concerns related to software development or live-organism concerns related to biotechnology, intellectual property has reemerged as one of the hot topics in modern jurisprudence. As one commentator observed: Not long ago, intellectual property was a somewhat eccentric and arcane area far from the center stage of American law and best left to technical experts. However, in the last few decades, intellectual property law and policy have moved to the front of the legal agenda in controversies both within and between nations. The current ascendancy of intellectual property interest is reflected in according patents ever greater protections, even if competition is thereby restricted. Historically, the treatment of both antitrust and intellectual property concerns has run in a rough boom-and-bust cycle. In the first several decades of the twentieth century, innovation was prized above government intervention in the marketplace. Beginning in the 1930s, doubts regarding the sacrosanct nature of market principles reversed this course, with progressive antitrust enforcement sometimes invalidating patents. While jurisprudence since the 1950s has largely created separate spheres for antitrust and patent law, it is nevertheless clear that anticompetitive behavior is only rarely advanced as a basis for scrutinizing the granting of patents today. The current breadth given to intellectual property law is attributable in part to the appellate court that hears intellectual property cases, the Court of Appeals for the Federal Circuit. Despite its noted penchant for intervention into fact-finding, the Federal Circuit is an intermediate federal appellate court, and not a trial court. It reviews patent cases taken on appeal from district courts, such as the Unocal patent case. Some critics have observed that "[a]lmost since its inception, the Federal Circuit has been dogged with criticism for straying from the path carefully delineated for appellate tribunals." The Federal Circuit has become so interventionist that displeased litigants appeal hoping that the Federal Circuit will in essence retry their cases. The emphasis of the Federal Circuit on granting larger numbers of patents in more diverse areas of art is a matter of record: Congress set up a new appeals court to which all patent appeals were referred. It was a procedural reform, to clear up a mess of inconsistent decisions from different courts, but its effect was dramatic. Before the court was established, around one in three patent-holders won their cases. After it, around two in three did. Landmark court decisions have made new areas of technology patentable. A 1980 case opened up biotechnology and genes for patenting; a 1981 case allowed the patenting of software; and a 1998 case has spawned more business-method patents. In many corporate sectors, the patent has been transformed from a mere legal tactic into an important and viable element of aggressive business strategy. After Microsoft paid IBM $30 million for infringing on a patent, Chief Executive Officer Bill Gates transmitted a memorandum to his employees exhorting them to patent whenever possible. When viewed in the context of strategic patenting, and with an eye to the record of the Federal Circuit in accommodating this trend, the Unocal patent case begins to appear consistent with emerging trends in intellectual property jurisprudence. Essentially, Unocal did not seek to patent the underlying commodityclean gasoline. Instead, it attempted to patent the "art" or knowledge reflected in the establishment of certain parametric ranges of gasoline property. In this way, the Unocal strategy is associated with better known trends in the high-technology sector. As hardware has become commoditized, the strategic patents are those that focus on the underlying "process." Of course, the risk in the ever-expanding reach of strategic patenting is that it will lead to unanticipated consequences. As Professor Aoki concluded, "[o]verall, U.S. intellectual property rights cover too much and are still expanding, generating an intellectual property smog."

1. CONFLICTS IN PUBLIC POLICY PRESENTED BY THE UNOCAL PATENT CASE

Environmental Policy

Congress adopted the Clean Air Act "to protect and enhance the quality of the Nation's air resources so as to promote the public health and welfare and the productive capacity of its population." As a package, it is undeniable that the Clean Air Act Amendments of 1990 have made significant contributions to environmental protection. The RFG Program in particular has exceeded all expectations for control, as this author recently testified before the Senate Energy and National Resources Committee: EPA has compiled data for the United States showing that Phase I RFG has surpassed the requirements of the Clean Air Act. An analysis of the Phase I RFG produced by refiners shows that the fuel reduces ozone-forming compounds, such as VOCs, by over 28 percentthat's 44 percent above the requirement of the law. Air toxics are reduced by approximately 30 percentthat's almost twice as much as required by law. Ambient air monitoring confirms that the RFG program is working. Testing shows that benzene levels have declined by 31 percent between 1994 and 1997. These percentage reductions in air emissions resulting from the RFG Program are by no means insignificant to human health. The EPA recently estimated that seventy-five million Americans are now breathing cleaner air as a result of the program. The cleaner air results from a reduction of VOCs that inhibit ground-level ozone, or smog. Smog causes: known health effects, which include irritation and inflammation of lung tissue, shortness of breath, chest pain, coughing, congestion, nausea, throat irritation, and increased susceptibility to respiratory infections. Studies have shown an association between elevated levels of ozone and increases in hospital admissions for respiratory problems in several cities. Young children and those suffering from respiratory conditions such as asthma and emphysema are more vulnerable to the effects of ozone pollution, but healthy adults are also affected by exposure to ozone. While some see both advantages and disadvantages in implementation of the RFG Program, the consensus view seems to be that the program produces strong net benefits in protection of human health and the environment. However, there has been some controversy associated with the use of the fuel additive methyl tertiary butyl ether (MTBE). Yet, on balance, use of MTBE appears to have provided a reasonably-priced and effective air pollution control measure in its own right. How then does upholding the Unocal patents undermine the RFG Program itself? It does so by fundamentally altering the cost structure of the program. There can be little doubt that the demands for royalties made by Unocal alter the cost structure of RFG. If the cost structure of RFG yields an unacceptably high price at the pump, the fabric of political support for the program will inevitably fray. As one clean air expert has observed: A number of control requirements mandated by the 1990 CAAA [Clean Air Act Amendments] have not yet started to bite. When they do start to bite, there will be a whole new community of people brought into the debate. Members of this community will not be acquainted with, or interested in, the overall policy goals of the CAAA, only its immediate effect on them. They will only know that pain is being inflicted and they will want it to go away. Because of this, you will see legislation introduced removing many of the those requirements of the CAAA. Moreover, some states participate in the RFG Program because they chose to opt in. Despite significant initial enthusiasm for participation in the RFG Program as one way to demonstrate progress toward attaining air goals, it is clear that an alteration of the cost-effectiveness of the program could prompt agitation for opting out in some cases. It must be expected that as the relative costs of mobile source controls increase, such voluntary state participants may once again shift to an emphasis on stationary source controls. Doing so would leave the greater portion of air quality needs unaddressed. Last, even if the RFG program suffers no official retrenchment based on legislative revisiting or opt-outs, price increases may well force some manufacturers out of the RFG market. Simply put, if the cost of the Unocal royalties becomes the marginal difference in comparative advantage between small blenders and refiners and their large, integrated competitors, such smaller competitors may simply leave the RFG market altogether. In short, it is clear that the continued cost-effectiveness of the RFG Program is essential to the program's successful implementation. Unforeseen changes in circumstance can alter the careful balance of the Clean Air Act, undermining air pollution control across the country.

Consumer Policy

As discussed, changing the economic structure of the RFG Program directly conflicts with environmental policy as reflected in the Clean Air Act. These same cost factors bring the Unocal patents into conflict with consumer energy policy. When Congress established the Federal Energy Administration (FEA) in 1974, it explicitly found that "the general welfare and the common defense and security require positive and effective action" to ensure "the maintenance of fair and reasonable consumer prices" for energy. As the FEA gave way to the establishment of the Department of Energy, Congress again reiterated the need "[t]o promote the interests of consumers through the provision of an adequate and reliable supply of energy at the lowest reasonable cost." On a separate track, federal antitrust policy also underscores the objective of protecting consumer welfare through maintaining adequate energy supply and reasonable prices. The director of the Federal Trade Commission's Bureau of Competition explained this policy: Consumer welfare is the goal of antitrust enforcement across all industries. Its importance is particularly clear in the energy industry, where even small price increases can strain the budgets of many consumers, particularly those with low and fixed incomes, and of small business, and, as a result, can have a direct and lasting impact on the entire economy. In fiscal years 1999 and 2000 to date, the Bureau of Competition spent almost one-third of its total enforcement budget on investigations in energy industries. In the summer of 2000, American consumers were treated to gasoline prices substantially higher than predicted by industry or government. The factors that contributed to this gasoline price increase were many, including higher crude oil prices, the use of ethanol in clean, reformulated gasoline, pipeline problems, and low inventories of crude oil, gasoline, and blendstocks. However, another factor complicating the situation for gasoline consumers was the continuing controversy surrounding the Unocal patents. These patent claims impose direct costs on refiners allegedly operating under the teachings of the patent, and create indirect costs for refiners attempting to blend around the patents. Worse yet, given the acknowledged dearth of RFG supplies in certain regions, the Unocal controversy created a chilling effect forcing some refiners to reconsider their continued participation in the RFG Program. Taken together, legal uncertainties present in the case helped to perpetuate conditions under which the spot market for RFG was quick to yield high prices and slow to return them to more acceptable levels. While reasonable minds may legitimately disagree over the aggregate effect of the Unocal patent on the price of RFG, there can be no doubt that the atmosphere created by the controversial origin of the patent has undermined the stability of the RFG program. The Congressional Research Service wrote that, [r]efiners using the Unocal process without a license operate in an area of uncertainty, because the cost of licensing the Unocal process has not yet been determined. Some contend that this uncertainty created by the court decision has impacted adversely RFG production.

Regulatory Policy

Congress has long recognized the value of cooperative negotiations between industrial, public interest, and governmental actors. The adoption of statutes like the Federal Advisory Committee Act (FACA) had the purpose of preserving vital cooperative efforts without subverting the process to the special interest motivations of the participants. The use of cooperative regulatory negotiation was a particularly critical element in the development and implementation of the federal RFG Program. Such cooperation is essential to developing complex programs and ensuring that such programs are implemented with a minimum of subsequent interference from either the courts or Congress. The use of regulatory negotiation to achieve consensus has become an essential element in the implementation of the Clean Air Act. The Reg-Neg process began as an informal one in the 1980s, springing from traditional uses in command-and-control regulations. In 1990, the process was formalized with the adoption of the Negotiated Rulemaking Act, involving protections such as Federal Register notice, retaining an independent convenor, and other protections pursuant to FACA. In order to make regulatory negotiation a success, a certain degree of forbearance from the exercise of legal rights was necessary and expected. A large amount of forbearance was required in this case, as discussed above, because participation in the Auto/Oil group and discussions with the state of California required Unocal to forego its propriety interest manifested in subsequent patent prosecution. Far more is at stake in the current case than the cost-effectiveness of the federal RFG Program. Unocal participated in cooperative exercises with state and federal officials and fellow members of the industrial community. Thereafter, Unocal arguably manipulated its patents through amendments to capture the fruits of this joint labor. It did so without the "full, clear, concise, and exact" statement required under applicable patent law. If patent law allows Unocal to benefit monetarily from participation in cooperative negotiations, the whole fabric of regulatory negotiation and compromise may well fray. This loss of cooperation undermines the regulatory process, and can diminish environmental protection if research efforts are thereby chilled.

National Security

Although arguments premised on the link between energy price and supply and national security have fallen out of fashion of late, no one can doubt that the tragic events of September 11, 2001 once again have focused some attention on the importance of fully assessing the impact of energy issues on national security. Indeed, motor fuel supply was called into question within hours of the terrorist attacks in New York and Washington. While the initial gasoline price responses to the terrorist attacks were later seen to be without real foundation, it is equally clear that a robust and healthy petroleum refining sector is intimately related to national security and the capacity for force mobilization. The National Defense Council Foundation (NDCF) noted that five different Presidents Eisenhower, Kennedy, Nixon, Ford and Carterimposed restrictions on imports of refined petroleum products because they recognized that maintaining healthy domestic refining capacity was essential to national security. To the extent that the Unocal patent undermines the health of the sector, its application is inconsistent with national security objectives. In a very real way, endangering the federal RFG Program can also result in significant reductions supply as oxygenates exit the market. First, the amount of refined products required to supply a modern military far exceeds the amount required in the past. For example, during the peak of Operation Desert Storm, the half million U.S. military personnel involved consumed more than 450,000 barrels of light refined products per day, nearly four times the amount used in World War II by the two million strong Allied Expeditionary Force that liberated Europe. Second, the nature of modern warfare necessitates the use of high volumes of gasoline and other refined products. The shorter warning time requires massive air lifts of supplies overseas, and the increased emphasis on heavy bombing and maneuver warfare such as that used in the Gulf War created a significant demand for refined products. Further, because these modern conflicts are likely to take place in underdeveloped regions and because of the short warning period, many of the refined products necessary for mobilization must originate from domestic sources. Finally, because domestic demand during full mobilization (two simultaneous regional conflicts) could increase by twenty-eight percent, the United States would necessarily experience an ever-increasing reliance on foreign sources of supply. As domestic capacity decreases and the anticipated requirements for the military increase, justifying the status quo based on the belief that foreign countries will provide the necessary supply represents a dangerous alternative. As NDCF noted, "there can be no doubt that with a deficit of refining capacity of the magnitude anticipated, the nation's national security would clearly be threatened." In order to assess the impact of these factors, the NDCF analyzed military needs in several scenarios and then compared those needs to our domestic refining capacity. If a military conflict were to break out, the differential between domestic refining capacity and domestic consumption would obviously increase due to the needs of the military and the military industrial complex. "Even if draconian conservation and rationing measures were employed during a conflict, and succeeded in achieving a reduction in civilian demand of as much as 20%, a severe shortage would still develop." A twenty percent demand reduction is far greater than any past decrease in demand experienced in the United States (three times greater than the Arab oil embargo and six times greater than the Iranian oil boycott). The economic impact and the threat to our national security are both to be avoided if at all possible. As the U.S. Energy Association succinctly put it, "the decline in our domestic . . . refining capacity cannot conceivably be in our national interest."

1. POTENTIAL SOLUTIONS

In a perfect world, competitors are supposed to use patents, in the words of Abraham Lincoln, to add "the fuel of interest to the fire of genius, in the discovery and production of new and useful things." Obviously, President Lincoln did not anticipate the use of strategic patenting, particularly when corporations participate in joint exercises in pursuit of an open regulatory proceeding. Of course, the typical dispute resolution mechanism for patents once issued is the courts of the United States. Therefore, once the Federal Circuit ruled in the Unocal case, and the Supreme Court declined to grant a petition for review, the list of easy answers to the questions posed by the case diminished.

Administrative Remedies

The Solicitor General of the United States, in opposing the certiorari petition filed before the Supreme Court, described the Unocal case as presenting insufficiently novel legal arguments to justify review. Nevertheless, the Solicitor General stated that, "[w]e share the petitioners' and amici's concern about a potential misuse of the regulatory process by a patent applicant." Although arguing against Supreme Court review, the Solicitor General observed that government agencies like the Federal Trade Commission (FTC) "may impose non-patent remedies against parties who make affirmative misrepresentations to a public or private regulatory body involved in setting industry standards." The FTC has a long history of involvement in cases where intellectual property claims are used impermissibly to produce anti-competitive results. In 1995, the FTC and the Department of Justice released new guidelines to be used "in pursuing antitrust charges against entities involved in questionable licensing of intellectual property rights." These guidelines were an attempt to provide greater certainty and predictability to the intervention of government agencies. In March 2001, the petitioning Refiners in the Unocal case decided to take the Solicitor General's advice, and they filed a petition before the FTC. The FTC investigation examines whether the Unocal patents on production processes for cleaner burning gasoline violate fair competition laws. The petition apparently alleges that Unocal used information gained pursuant to its participation in a regulatory negotiation in order to obtain patents, and did so in contravention of its public agreement not to do so. The FTC has described the range of its potential remedies as follows, although there has been no specific time limit offered for consideration of the petition: Should the F.T.C. find evidence of anti-competitive practices, it has several options . . . The commission could simply close the case and reserve the right to take action later. It could forge a consent agreement with Unocal in which the company might drop its demands for royalty payments without admitting wrongdoing. If an agreement cannot be reached, the commission could file suit against Unocal in federal court or in its own administrative law court. It could also ask the Justice Department to file suit seeking damages against Unocal. While the FTC certainly has a range of potential responses, no result is guaranteed by operation of law, nor is Unocal bereft of defenses. For example, if Unocal contends that the regulatory negotiation in which it participated was part of its extended right to communicate with the government regarding matters of public policy, Unocal might advance a broad theory of protection for its actions under the so-called Noerr-Pennington doctrine. While the Noerr-Pennington doctrine does protect legitimate petitioning of the government as a form of speech largely excepted from antitrust analysis, it has been clear since the inception of the doctrine that it cannot be used as a "mere sham to cover what is actually an attempt to interfere directly with the business relationships of a competitor." The question of whether the FTC, or a potential reviewing court, will believe that Unocal's actions are protected is essentially a factual one. If it can be established that Unocal affirmatively misrepresented its intentions regarding compliance with the cooperative research agreement, or that it misrepresented its understanding of cost analysis by failing to disclose its strategic patenting, such misrepresentations could be material to any Noerr-Pennington analysis. As the D.C. Circuit has stated, "[h]owever broad the First Amendment right to petition may be, it cannot be stretched to cover petitions based on known falsehoods." Of course, the degree of corruption necessary to overrule protection exists on a spectrum. The more corrupt the conduct, the less likely that it will be protected. In particular, if the purpose of deception is to fool an administrative agency into a certain regulatory course, it is easy to understand the reluctance of the government to allow an antitrust exemption to be a 'get-out-of-jail-free card.'

Legislative Options

The story of the Unocal patents has not escaped the attention of Congress, particularly in light of the case's often-reported relationship to high gasoline prices. In both the 106th and the 107^th Congresses, legislation was introduced to address the Unocal patents. The language of these bills, according to the Congressional Research Service, purports to "[a]mend the Clean Air Act to authorize licensing of patents in cases where a right to a patent is necessary to comply with provisions regarding the regulation of fuels." The Clean Air Act already has a provision requiring the mandatory licensing of patents needed for compliance with certain technological standards. However, the legislation in question, introduced by Representative Dennis Kucinich (D-OH), among others, would add the RFG Program to the list of provisions to which mandatory licensing already applies at Section 308. As Representative Kucinich describes his approach: [The Unocal] patent restricts the production of gasoline, thus reducing the supply and increasing prices. The Clean Air Act, passed in 1970, gives the Attorney General the power to order the licensing of such fuels at fair and reasonable prices to all manufacturers; however, RFG did not exist at the time and was not included in the Act, thus prohibiting the Attorney General from giving such an order. The Gas Price Spike Act [H.R. 1967] would modify the Clean Air Act by incorporating RFG, and permitting such action. The targeted approach reflected above has much to recommend it because it focuses attention narrowly on the issue of patents that may interfere with an environmental regulatory scheme. However, it should be clear that all the relief available under this legislative approach is limited to mandatory licensing at fair and reasonable rates. There has never been a concern that Unocal would avoid licensing its intellectual property; it is only too happy to do so. However, the definition of fair and reasonable is still capable of producing major perturbations in the marketplace for gasoline. There are, of course, more substantial legislative approaches that are worthy of some consideration. For example, a medical activity exemption exists within the patent law to shield doctors from patent liability when undertaking procedures that may, in part, be reliant on patented intellectual property. In the same way, refiners of RFG are performing a social purpose in cleaning the air for protection of the health of Americans in our most polluted cities. Thus, refiners of RFG could be eligible for similar exemptions. As one intellectual property attorney described the medical exemption: "The exemption exists because we as a society have decided that we want to promote treatment of sick people, and we want to give medical doctors an opportunity to heal people if that opportunity is available." In the same way, refiners participating in production of RFG seek to heal communities by reducing air pollution.

Longer Term Options

Of course, viewing the Unocal patents through the lens of the special, protective role of environmental policy is not the only option open for appropriate legislative reform. As discussed above, in periods of national distress, there is an undeniable link between the robustness of the refining sector and the national security of the United States. Most of the national security controls placed on patents arise when the PTO is considering the patent application. If publication of a patent might be detrimental to national security, the Commissioner of Patents may order a special review, which can result in a secrecy order. There are certain remedies available if the effect of a patent's license has an adverse impact on national security. For example, the Royalty Adjustment Act authorizes government agencies to adjust unilaterally royalty payments to a licensor on articles supplied by a licensee during times of war, on the grounds of national security. While no one is suggesting that current circumstances constitute an act of war in anything other than a metaphorical sense, it is also clear that national security exceptions to current patent law do not end with mere secrecy reviews. With greater congressional attention paid to a range of national security improvements, it is reasonable to cast a glance at security constraints on intellectual property protection. In both the cases of environmental or national security amendments to the patent law, the government must face the issue of compensation for the lost value of the patent, largely because patents are specie of property protected by the Fifth Amendment. The Supreme Court has determined that governmental infringement on intellectual property can effect a Fifth Amendment "taking." Though any delimitation of patent rights can be so criticized, the case for takings is not open and shut. For example, the Supreme Court has "generally been unable to develop any 'set formula' for determining . . . what constitutes a taking." Indeed, among the factors that must be considered in evaluating the takings claim of intellectual property is the degree of "interference with reasonable investment-backed expectations." If reasonable expectations, in the case of the RFG, can be defined by the four corners of the regulatory negotiation process, it is not clear that royalty payments for the Unocal patents come within the scope of a taking. In any event, like the applicability of the Noerr-Pennington doctrine, takings cases turn on facts. Further, both environmental protection and national security provide rationales for applying the government's inherent police power. Even the most intrepid defender of property rights must concede that police power can be a daunting barrier to recovery of compensation for an alleged taking. Looking to the future, the Unocal patents case may expose an even more fundamental flaw in the legal framework for granting patents in the United States. While the number of patents granted in both the United States and Europe has increased recently, the trend has been less marked in Europe. There has been some commentary urging the United States to adopt a model for granting patents similar to that in effect in Europe, where after a patent has been issued, competitors have a statutory right to oppose the patent before the agency that grants the patent. Patents are often overturned, and at least one commentator believes that such a system "helps weed out bad patents." While a comprehensive comparison of the two systems is beyond the scope of this article, more systemic reforms may be useful in addressing cases like the Unocal patents.

CONCLUSION

The Patent Clause of the U.S. Constitution "does not allow the granting of these valuable franchises to private individuals, with its consequent public detriment, unless there is a concomitant public benefit." The context of regulatory development in which the Unocal patents were filed and amended presents important public detriments, without corresponding benefits, which is reflected in both consumer and environmental policy. While the courts' commitment to public benefit is laudable in the abstract, it may not be realistic to expect a thorough analysis of benefit in light of the emerging permissive jurisprudence of the Federal Circuit regarding patentability. Therefore, it must fall to other institutions, such as the Federal Trade Commission or the Congress, to address competing public policy interests in a measured and balanced way.

Consider the strategic position of UNOCAL .

How did granting the patent improve their competitive position?

How did that competitive position change when the patent was upheld?

What options do UNOCAL's competitors have at this point?

Step 1:Evaluate the impact the granting of patent 393 to the competitive advantage of UNOCAL

Step 2:Evaluate the impact of the California District court upholding the UNOCAL 393 patent

Step 3:What options might UNOCAL's competitors have at this point for collateral attacks on the 393 patent