Jury Says 6 Oil Firms Must Pay Unocal in Suit

In a decision that could pump up the price of gasoline in California, a U.S. District Court jury said Monday that six major oil companies must pay Unocal Corp. 5 3/4 cents per gallon for violating a patent on cleaner-burning gasoline.

For now, the damage award applies only to 1.2 billion gallons produced during a five-month period in 1996 that the Los Angeles jury last month found violated Unocal’s patent. It amounts to at least a $69-million windfall for Unocal, which secured the patent on a version of the gasoline that refiners in California have been producing since early last year under clean-air mandates.

But depending on negotiations among the oil companies, as well as future gasoline formulas that the companies opt to use, the impact on California gasoline consumers could range from virtually nothing to several cents per gallon. And one analyst said it could generate as much as $300 million annually for Unocal.

Oil industry experts have speculated that Unocal’s courtroom victory over Atlantic Richfield Co., Chevron USA Inc., Exxon Corp., Mobil Oil Corp., Shell Oil Products Co. and Texaco Refining & Marketing Inc. would prove costly to California motorists, who could end up paying the entire tab if the oil companies pass along any ongoing royalties on current and future gasoline production--fees that Unocal surely will negotiate with its opponents. But Unocal, in a statement released Monday, insisted that any royalty is limited in scope and would have only a slight effect on consumers.

“We don’t believe that this jury award and subsequent licensing fees should have a significant impact on consumer prices,” said Roger Beach, Unocal chairman and chief executive. “Ultimately, the individual refiners and the marketplace will determine the financial impact of the patent royalty on California motorists.”

Unocal’s shares rose 75 cents to close at $42 on the New York Stock Exchange..

Unocal had asked for damages ranging from 5 cents to 7.5 cents per gallon. The damage award does not apply to production by the six companies since July 31, 1996, which still must be calculated, Unocal said. In addition, patent infringement by other refiners not included in the lawsuit also must be determined.

As for future production, “it depends on what they want to negotiate,” said Michael Ciresi, a lawyer with the New York law firm of Robins, Kaplan, Miller & Ciresi, which has been representing Unocal at the trial.

But because the lawsuit has not yet concluded, the whole matter of gasoline price increases from the patent could become moot. In a third and final phase of the trial to begin Dec. 2, U.S. District Judge Kim McLane Wardlaw must decide whether the Unocal patent is enforceable. In that phase, Unocal’s competitors will argue that the company misled the U.S. Patent Office by seeking a patent on information that was already well-known.

If Wardlaw rules that the patent is not enforceable, then Unocal would collect no money from its opponents. Lawyers for the losing oil companies have said they will appeal if Wardlaw rules against them.

“We are disappointed with the verdict and strongly disagree with the award,” said a spokesman for the six Unocal competitors. “Unocal acted in an unfair and improper manner in obtaining the patent, and should not receive any royalties.”

On Oct. 14, the jury determined that 29% of the gasoline produced by the six defendants in California between March 1, 1996, and July 31, 1996, or nearly 1.2 billion gallons, violated the patent held by Unocal since 1994. The Unocal patent covers a type of “summer” gasoline produced only about 7 1/2 months a year. About 13 billion gallons of gasoline were sold in the state last year.

The decision on damages was reached Thursday after two days of jury deliberations, but was sealed until Monday.

The six Unocal competitors sued two years ago to invalidate Unocal’s patent. They contended the patent was too broad and that it was based on information already well-known in the industry, which competitors had shared as part of a research coalition to find gasoline that would meet tough guidelines established by the California Air Resources Board.

Unocal said it applied for the patent in 1990 based on independent research by its own scientists. Unocal’s reformulated gasoline, which does not contain controversial additives, has helped reduce air pollution in California, the company said, adding that it will “offer its patent for license in order to spread these benefits as widely as possible to industry and the public.”

If Unocal is able to negotiate an ongoing license fee of more than 4 cents a gallon, then consumers could pay 1 cent to 2 cents a gallon more for gasoline made under the Unocal patent, said John Hervey, an analyst with Donaldson, Lufkin & Jenrette.

If the fee is less than 4 cents per gallon, “it will probably be invisible to the consumer,” Hervey said. “In any case, we’re only talking pennies, not nickels and dimes.”

Unocal, which sold its refineries and gasoline stations earlier this year to Tosco Corp. and no longer makes gasoline, could earn about $300 million a year from royalties of 4 cents a gallon, Hervey said. (Tosco is not a party to the lawsuit, but the Tosco-owned gasoline stations still display the familiar orange “76” signs.)

“The company could never make any money in refining and marketing when it owned the assets. Now, it’s going to make money when it doesn’t own them,” Hervey cracked.

But energy economist Philip Verleger Jr., who was a consultant to the six Unocal competitors, said the price increase could be 6 cents or more per gallon, based on market and economic forces that dictate that the price of anything is based on how much it cost to make the most recent product.

“Californians are about to get a lesson in marginal economics,” Verleger said. The price could be boosted further if it scares away out-of-state refiners.