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In Patent Suit, Unocal's Gain Would Prove Motorists' Pain

Energy: Royalties would enrich the company, but at the expense of drivers, who would pay more at the pump.


A volatile mixture of money and oil has reached a Los Angeles courtroom, where former allies in the drive for cleaner-burning gasoline are dueling over who crossed the finish line first.

At stake are potentially hundreds of millions of dollars in royalties that could enrich Unocal Corp.--this at the expense of California motorists who could end up paying several more cents per gallon at the pump as a result.

El Segundo-based Unocal holds a broad, disputed patent for reformulated gasoline, the type of fuel that California service stations have been selling almost exclusively for more than a year under state clean-air mandates.

Lined up against Unocal in court is virtually the rest of Big Oil: Atlantic Richfield Co., Chevron U.S.A. Inc., Exxon Corp., Mobil Oil Corp., Shell Oil Products Co. and Texaco Refining & Marketing Inc.

Those companies filed suit two years ago to invalidate Unocal's patent, requested quietly in 1990 when the competitors were supposedly cooperating on developing reformulated gasoline, and to stop Unocal from collecting royalties. Unocal counter-sued to prevent other oil companies from violating its patent.

Lawyers are to present closing arguments today in U.S. District Court in Los Angeles, after which the jury will get the case. If the jury decides that Unocal's patent is valid, more testimony will be presented on what royalties Unocal should receive. Patent lawyers have judged Unocal's chances as better than even because of the traditional reluctance of juries to overturn patents.

Unocal has not revealed what it would demand in royalties. But industry watchers have speculated that if Unocal were to prevail, it could command royalties of anywhere between 1 cent per gallon and 7.5 cents per gallon.

If Unocal got only one penny on each gallon of the roughly 13 billion gallons of cleaner-burning gas sold in California each year, that would bring in $130 million annually--most of which should go directly to the bottom line. Five cents would translate into $650 million a year.

Even the smaller figure would be a major windfall for a company that earned $456 million from operations last year and isn't even in the oil-refining or retail businesses anymore. In the three years since it received the patent on reformulated gasoline, Unocal has sold its California oil fields, its refineries and its gasoline stations (now owned by Tosco, although they still bear the Unocal name and orange ball).

It also sold all its refining patents but one--the patent for reformulated gasoline.

Unocal now focuses on overseas production and exploration in places such as Thailand and Myanmar.

"It could be quite substantial for them," said Michael L. Mayer, an oil industry analyst with Schroder & Co. in San Francisco. Mayer is recommending Unocal's stock even without the benefit of potential future royalties from the gasoline patent.

Slightly more than 1 billion gallons of cleaner-burning gasoline have been sold each month since the spring of 1996, when California service stations were required to sell the reformulated gas mandated by the California Air Resources Board, giving the fuel its nickname "CARB gas."

The lawsuit, which went to trial July 15, has generated 39 volumes of court filings over esoteric scientific formulas.

But for consumers who drive California's 24 million motor vehicles, the result of a Unocal win might be more than esoteric. Just as some of the higher cost of producing reformulated gasoline--estimated at an extra 5 cents to 8 cents per gallon--is already being passed along to consumers, so would the cost of any royalty fee that refiners might be charged.

"Pretty much all of any royalty would be passed along to consumers because margins are not that good for refiners," said one refinery consultant. "Consumers pay $1.40 for gasoline, and only 5 cents in profit goes to the refiner on a good day."

CARB gas is made from new recipes developed with the help of a coalition of gasoline refiners and auto makers that was formed in the late 1980s. The unprecedented cooperation between fierce competitors was seen as the only way to meet clean-air deadlines.

But in 1990, Unocal applied for a patent on formulas it contends were developed by its own scientists independent of the industry coalition. The patent was granted in 1994.

There is more than one way to make cleaner-burning gasoline. But the six companies that sued Unocal contend that the company's patent is so broad that virtually any formula devised would infringe the patent in some way.

They argue that not only is the patent too broad, but the gasoline formula can't even be patented because it was developed using information the companies shared as a coalition and was a product mandated by the California Air Resources Board. Patents are to be granted for inventions and formulas that are not "obvious"--that is, already in general use or well-known.

Unocal contends that the coalition allowed each company to conduct its own private research and that that is what resulted in the Unocal patent.

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