FTC Administrative Law Judge Rules UNOCAL’S Patent-Related Activities Before State And Private Standard-Setting Bodies Immune From Antitrust Attack

By Stan Gorinson, Emmanuelle Rouchelle and Connie Robinson

Introduction

The attached article will be of interest to companies that compete in industries in which intellectual property rights have the potential to affect competition in a significant way. On November 25, 2003, an Administrative Law Judge dismissed a Federal Trade Commission ("FTC") Complaint against Union Oil Company of California ("Unocal") on the basis that the complained of conduct is entitled to antitrust immunity under the Noerr-Pennington doctrine and that the other issues required an analysis of substantial issues of patent law and thus are outside the FTC's jurisdiction. Over the last decade, the federal antitrust enforcement agencies, the FTC and DOJ, have become increasingly more concerned with how intellectual property owners may use, and perhaps abuse, their rights to foreclose competition, possibly in violation of the antitrust laws. In recent years, the FTC in particular has taken aggressive enforcement positions against intellectual property owners, which should make this case even more interesting when the full Commission hears the FTC's appeal, which was filed on December 2, 2003.

On November 25, 2003, Administrative Law Judge D. Michael Chappell ("ALJ") dismissed a Federal Trade Commission ("FTC") Complaint holding (1) that Union Oil Company of California’s ("Unocal") conduct constitutes "petitioning" of a governmental authority and is, therefore, entitled to antitrust immunity under the Noerr-Pennington doctrine, which protects certain lobbying and advocacy before governmental entities, and (2) that the other issues raised by the Complaint would require in-depth analysis of substantial issues of patent law and thus are outside the FTC’s jurisdiction. In our March, 2003 Legal Alert, we reported that the FTC’s Complaint against Unocal and other recent enforcement actions shows an increasingly aggressive enforcement policy on the FTC’s part towards patent abuses running afoul of the antitrust laws. But the ALJ’s recent decision in Unocal may have dealt the FTC a set back in its efforts to attack certain abuses by patent owners.

On March 4, 2003, the FTC filed a Complaint against Unocal for allegedly violating the antitrust laws by illegally monopolizing, attempting to monopolize, and otherwise engaging in unfair methods of competition in the markets for technology of and manufacture and sale of low emissions, reformulated gasoline. The Complaint alleged that Unocal misrepresented and concealed information from the California Air Resources Board ("CARB"), a California state agency, and at least two private industry groups -- the "Auto/Oil Group" and trade association Western States Petroleum Association ("WSPA") -- causing CARB to unknowingly adopt regulatory standards for low-emissions, reformulated gasoline, which substantially overlapped with Unocal’s patents in this field. Unocal allegedly misled CARB and the private industry groups into believing either that Unocal had no relevant IP rights or that it would not enforce any IP rights that it might have covering the particular standard. After CARB adopted the Unocal technology as the required standard in California, Unocal revealed the existence of its patents and began suing to enforce them. The FTC alleged that the effect of Unocal’s conduct was to harm competition and consumers.

Specifically, the Complaint alleged that CARB relied upon industry participants to provide research and results for its rulemaking to determine "cost effective" regulations and standards governing the composition of low-emissions, reformulated gasoline. Unocal developed a plan to supply CARB with information to induce the agency to adopt regulations that overlapped with Unocal’s patent claims, and actively participated in the CARB rulemaking proceedings. In July 1991, Unocal presented its emissions research to CARB, but neglected to inform CARB of Unocal’s proprietary interests or that the proposed regulations would require use of Unocal’s intellectual property rights. Thus, according to the FTC, through misrepresentations and omissions, Unocal improperly influenced the outcome of CARB’s reformulated gasoline rulemaking. Not knowing about the alleged misrepresentations and omissions, CARB selected and implemented regulations that substantially overlapped with patents held by Unocal relating to low-emissions, reformulated gasoline. The FTC further alleged that Unocal made similar misrepresentations and omissions to the private industry groups and that, but for Unocal’s fraud, these participants would have taken steps in the rulemaking process to minimize or avoid any adverse effects resulting from CARB adopting Unocal’s patented technologies as a required industry standard.

Unocal sought dismissal of the Complaint on the basis that its activities were immunized under the Noerr- Pennington doctrine and that the FTC failed to sufficiently allege that Unocal possessed or dangerously threatened to possess monopoly power. The ALJ granted Unocal’s motion to dismiss. The FTC staff has indicated that it will appeal the ALJ’s decision to the full Commission.

The ALJ dismissed the FTC’s Complaint on the basis that Unocal’s actions directed toward both CARB and the private industry groups were subject to antitrust immunity under the Noerr-Pennington doctrine. And, to the extent an independent action, separate and apart from the legislative petitioning to CARB, existed for its actions directed toward the private industry groups, the FTC lacked jurisdiction because review of those allegations involved substantial questions of patent law falling outside the FTC’s jurisdiction.

Under the Noerr-Pennington doctrine, activities to petition the government, such as through lobbying legislators or advocating private interests before a regulatory agency, are generally immune from antitrust scrutiny. A party can lose Noerr-Pennington immunity, however, by making knowingly false representations to an adjudicatory or "quasi-adjudicatory" body. But such deliberately false statements will not jeopardize a party’s Noerr-Pennington immunity if made to a legislative or "quasi-legislative" body. Therefore, antitrust immunity would apply even though Unocal allegedly misrepresented and concealed facts to CARB so long as CARB was acting as a legislative entity.

The FTC claimed that Noerr-Pennington should not apply because CARB was acting as a quasiadjudicatory body, rather than a legislative or quasi-legislative body. The ALJ rejected the FTC’s argument, holding that CARB’s rule making process was a quasi-legislative proceeding. In reaching this holding, he examined 1) the level of political discretion granted to CARB; 2) whether CARB was setting policy; 3) the procedures used during the rulemaking; and 4) the authority invoked by CARB in adopting the RFG regulations. The ALJ determined that each factor favored a finding that CARB’s rulemaking proceeding was quasi-legislative and not adjudicatory in nature. Accordingly, the ALJ determined that Unocal’s conduct before CARB constituted political petitioning behavior immunized under Noerr- Pennington.

The ALJ further determined that Unocal’s actions did not fall within the "sham" exception to Noerr- Pennington -- an exception undercutting immunity typically applied to litigation conduct that is objectively baseless and designed to interfere with a competitor’s business through the litigation process as opposed to the outcome of a lawsuit. Here, the ALJ reasoned that the sham exception could not possibly apply because the FTC’s Complaint did not allege that Unocal attempted to gain monopoly power through CARB’s process but instead the FTC staff acknowledged that Unocal sought to use the outcome of the government action, i.e. the final RFG regulations, to achieve its purpose.

Noerr-Pennington also immunized Unocal’s actions directed at private industry groups, the ALJ concluded, even though they were not targeted directly at a legislative body because Unocal’s actions constituted "indirect petitioning" of a quasi-legislative proceeding, thus qualifying it for Noerr-Pennington immunity. In addition, the ALJ rejected the FTC’s rather controversial argument that Noerr-Pennington immunity does not apply to actions brought under Section 5 of the FTC Act, the statutory basis for the FTC’s suit against Unocal. The FTC tried to limit Noerr-Pennington’s application to suits brought under the Sherman Act, another antitrust statute and one that is subsumed within the broader strictures of the FTC Act’s prohibition against unfair methods of competition. The ALJ held that Noerr-Pennington immunity applies equally to suits brought under the Sherman Act and the FTC Act.

Finally, the ALJ determined that there was no independent cause of action under Section 5 of the FTC Act for Unocal’s actions directed toward the private industry groups. Determining whether Unocal owed and breached a fiduciary duty to the private industry groups and what harm, if any, resulted from any breach would require an in-depth analysis of Unocal’s proprietary interests. The FTC’s allegations directly called into question the scope of Unocal’s patents and whether third parties could have invented around the patents to avoid infringement. According to the ALJ, the FTC has no jurisdiction to consider such issues, but rather the federal courts have sole jurisdiction over these substantial issues of patent law under 28 U.S.C. 1338(a). Although the portion of the ALJ’s decision addressing the jurisdictional issue compromises a relatively small part of the decision, the ruling regarding the FTC’s jurisdiction (or lack thereof) may significantly hamper the FTC’s ability to continue its aggressive enforcement campaign against patent abuses, at least those requiring construction of patent claims or scope to determine what, if any, effect the conduct will have on competition.

On December 2, 2003, FTC counsel filed its Notice of Appeal indicating that it intends to appeal the ALJ’s decision to the full Commission. It seems likely that the Commission will reverse the opinion because (1) all but one of the members who will consider the appeal voted to issue the Complaint and the same legal issues were presented at that time, and (2) FTC Chairman Muris has raised concerns that the Noerr- Pennington doctrine has been applied too liberally and has appointed a task force to study the issue, indicating that actions designed to scale back the immunity are a high priority. Moreover, the Commission, which implicitly decided that it had jurisdiction over this action in voting to issue the Complaint, will probably find the ALJ’s jurisdictional ruling difficult to accept.