TCS Daily

Regulatory Mousetraps

By Ben Lieberman - April 1, 2003 12:00 AM

Build a better mousetrap and the world will beat a path to your door, especially if you've patented that mousetrap. Or, build and patent a mousetrap that isn't necessarily better but is the only one that complies with some new regulation, and the world will still beat a path to your door. But is it legal for a mousetrap maker to actively lobby for that regulation, while silently working to obtain such a patent? This is the controversy currently before the Federal Trade Commission (FTC), which has initiated an administrative complaint over a Union Oil Company of California (Unocal) patent for gasoline.

Both the federal Clean Air Act and California state law set numerous rules for the composition and emissions performance characteristics of gasoline. In the early 1990s, the California Air Resources Board (CARB) was creating new requirements for reformulated gasoline (RFG), a specialized blend designed to help fight smog. Unocal and other California refiners were involved in the rulemaking process, and had a hand in developing the specifics of the final rule.

Unknown to anyone outside Unocal, the company had a pending patent application for the fuel formulations it thought best able to meet these new RFG requirements.

Unocal received its patent in 1994 (and related ones later), and announced its intention to seek licensing fees from competitors in 1995. The new RFG provisions went into effect in 1996.

In 1995, the other California refiners, including Arco, Chevron, Exxon-Mobil, Shell, and Texaco, challenged the validity of the patent in federal court. This effort was unsuccessful. Unocal was awarded a royalty of 5.75 cents for every gallon of RFG that infringed its patent. This cost is passed on to California drivers in the form of higher pump prices. Though not the main reason California's gas prices currently lead the nation, the patent dispute has clearly exacerbated matters.

Related cases are still pending. But on March 4th, the FTC launched its own action against Unocal. It alleges that Unocal misrepresented itself during the rulemaking proceedings, presenting as "nonproprietary" information for which the company was in fact seeking patent protection. The agency also asserts that Unocal amended its original patent application to better reflect the emerging details of the RFG regulations.

FTC concludes that, absent this alleged deception, "CARB would not have adopted RFG regulations that substantially overlapped with Unocal's patent claims." FTC asserts that these and other allegations constitute a violation of the Federal Trade Commission Act, and seeks to stop Unocal from enforcing its patents against competitors making RFG.

Unocal denies any wrongdoing. The company points to the failed attempt to invalidate its patent as reason to believe it will prevail again. Unocal believes it merely came up with and patented some of the best-clean burning gasoline formulations around - the proverbial better mousetrap - and deserves reasonable compensation for this accomplishment. The case, currently before an FTC administrative law judge, could end up in federal court as well.

True or not, these allegations raise troubling concerns about the potential misuse of the regulatory process. Such concerns will only grow as the regulatory state expands its reach to more and more products. A patent on a better mousetrap is one thing, but a patent on a regulatory mousetrap is quite another.

Ben Lieberman is a senior policy analyst with the Competitive Enterprise Institute, in Washington, DC.

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