Untitled Texas Attorney General Opinion ( 1947 )

THEATTORNEY
OFTEXA~
,Honorable L. R. Pearson, Chairman
Oil, Gas & Mining Committee
House of Representatives
Austin, Texas
Dear Sir: Opinion No. V-97
Re: Effect which House Bill 67,
allowing agreements for co-
operative exploration, de-
velopment, and operation of
oil and gas properties, and
marketing of gas, would have
on the Texas antitrust laws.
We have your letter of March 5; 1947, a portion of which
reads :
“Would the passage of the proposed legislation as
outlined in House Bill 67 endanger the validity of the
antitrust laws of this State, and what, in your opinion,
would be the effect of this legislation upon our anti-
trust statutes from the standpoint of both validity
and enforceability?”
The portion of H. B. 67 touching on the antitrust laws
declares it to be lawful for two or more “persons” which would
include partnerships and corporations, owning, claiming, or con-
trolling production, royalties, leases, or other interest, in the
same oil or gas field, to enter into and perform agreements for
the purpose of bringing about cooperative explorations, devel-
opment, and operation of any part or all of such field. Among
other things, such agreements may provide for joint exploration;
location and spacing of wells; for cycling, re-cycling, repressur-
ing, and pressure maintenance; for the storage of gas; for the
marketing of gas, but not the marketing of oil; for the joint ex-
traction of casinghead gas and the return of the gas to the earth.
The bill allows agreements “for the equitable distribu-
tion on an agreed basis of oil and gas produced therefrom.” It
provides that no royalty shall be required to be paid on gas re-
- .
Hon. L. R. Pearson, Page 2, V-97
turoed .ta *he eaa-th.~ Lt-providre for~ths imbdinite extensions
(h&?ing) ob. leases coveting aqpart .of .the lands committed
thereto so long as ,otl nor gaatr .produeed tn any part of the
field covered by the agreement. In ,&her words, if the-agree-
ment covered a whole field, every privately owned lease in ,the
field c~ould be held indefinitely by production from one well
therein, wherever located.
The agreements are to become operative ,when ~approv-
ed by the Railroad Commission, after notice and hearing, after
a finding that they will prevent waste, or “tend” to promote con-
servation, and will protect correlative rights.
Section 5 provides that neither the making nor perfor-
mance of such agreements shall be unlawful or violate the anti-
trust laws of the State.
The portions of the antitrust laws most closely affected
are Art. 7426, R. C. S. 1925, and Art. 1632 P. C., both of which
define a “trust” as a combination by two or more persons or
corporations :
“1.~ To create, or which may tend to create, or
carry out restrictions in trade or commerce
*****
“2. ~To fix, maintain, increase or reduce the
price * * * * *
“3. ,To prevent or lessen competiti,on * * * * *
“4. To fix or maintain any standard or figure
whereby the price of any article * * * * *
or the preparation of any product for
market or transportation, shall be in any
manner affected, controlled or established.
“5~. To make * * * or carry out a contract.* * *
to preclude a free and unrestricted competi-
tion among themselves * * * or by’ which they
shall agre,e to pool, combine or unite any
interest they may have in connection with
the sale or purchase of any article or com-
modity * * * *
Hon. L. OR. Pearson, Page 3, V-97
“6. To.regulate;fix or limit the: qutput of, any
article or commodity which may be manufactur-
ed, mined, p~roduced .or,sold.”
It is obvious from a reading of then above statutes that H.B.
6.7 is inconxistent with all’of the above quoted sections of the anti-
trust laws in the following particulars:
1: The”above quoted antit,r.ust ,laws (Ses: 1, 3, 5) ,prohibit
agreements which restrict trade, lessen or preclude free and unre-
stricted competition. H. B. 67 makes such agreements lawful when
they are made by persons “owning:,~ claiming, or controlling pro-
duction, leases”’ , etc., in the ,“s~ame, oil field, gas field, or oil and
gas field. ” The proposed Bill not,only,les~sens competition but
legalizes combined production agreements which will preclude
competition between parties to the agreements.
2. The antitrust laws (Sec. 5) prohibit pooling, combin-
,ing, or uniting of interests in connection with sale or purchase of
any commodity`` H. BG,67 (get. Id) expressly allows agreements
among oil Companies and others in, connection with the marketing
of gas from a field.
3. The antitrust laws (Sec. 2 and 4) prohibit ag,reements
which fix or maintain prices or standards whereby prices or cost
of production oft any product are affected, controlled or establish-
ed. Hi 8. 67 permits such agreements aa to cost of production
of oil and gas and as to the price,,for which gas may be marketed.
4. The antitrust.laws (Seer 6) prohibit agreements
which fix or limit the output,,of any article or commodity which
may be mined, produced ,or.sold. : Under H. B. 67 such agreements
would be legal as to production within the unitized area.
Even such a desirable pr,ogram as the conservation of oil
and, gas bears scrutiny. No production at all, or small production,
would certainly conscrve’,the resources. But it would also lend
itself to monopoly and’price fixing, a@ other ends which the anti-
trust, laws were specifically enac,ted to ,prevent.,
Since ICB. 67 is inconsistent with the antitrust laws,
and sinc~e Section 5 there,of~,states thatthe making of such agree-
ments shall not be~declared unlawful, the subject matter of this
oil1 is made an outright exceptionto the antitrust laws.
Hon. L. R. Pearson, Page 4, v-97 ,:
There is no direct authority of the Courts on what ef-
fect thisparticular enactment would.have on the antitrust laws.
There is now a Texas Statute, Art. 6008, Set; 21, which permits
voluntary unitization of gas fields, including the marketing of
gas, with the approval of the Attorney General. This law has not
been tested in the courts on the antitrust feature,. H. B. 67
expressly provides for the repeal of Section 21 of Article 6008 in
its entirety and rewrites such law omitting the now-required ap-
proval of the Attorney General. (Sec. 21, Ch. 120, Acts 44th Leg.
R. S. p. 318).
Arkansas and Oklahoma have laws ,similar to H. B. 67
(Okla. Laws, 1945, pp: 162-170; Title 52, Sec. 286, 1 to 17;
Arkansas Laws, 1939, p. 219, Act 105, Sec. 15.) Each of these
statutes has a provision that such agreements shall not be con-
strued to violate the antitrust statutes. These laws have not
been tested on their antitrust provisions.
“Monopolies are contrary to the. genius of a free govern-
ment, and shall never be allowed:” Tex. C,onstitution, Art. I, Sec-
tion 2,6. Whether the subject bill will create m,onopolies cannot
be determined at this time. If it creates monopolies, the stat-
ute will be unconstitutional, and agreements made thereunder will
be void.
The danger to the .antitrust laws about which you show
concern is doubtless “the equal protection of the laws” clauses of
the Texas and Federal Constitutions. If exceptions are made to
the antitrust laws to the extent that one group is authorized to
do acts for which another could be fined and imprisoned, the anti-
trust laws would be held void, because such citizens would not be
receiving “equal’protection of the laws.”
When then, and under what circumstances may the Legisla-
ture make valid exceptions to the antitrust statutes 7 Articles
1643 and 1644 of the,Penal ‘Code make certain exemptions for labor
and trade unions; ,and Article 1642 of the Penal Code makes an ex-
ception in favor of agricultural products or live stock while in
the hands of producers or raisers. ,Art. 5762 R.C.S. exempts
marketing associations from such act.
The Texas Courtsand the United States Supreme Court
have upheld the Texas antitrust laws notwithstanding the above ex-
ceptions. The Courts’~have, held that the above exceptions were
Hon. L. R. Pearson, Page 5, V-97
reasonable, and. were warranted by,economic canditions. The
general rule is stated in,36 Am, Jur. 5~79‘:
“The cons&utional prohibition against dis -
criminatory class legislation requires ,that an, anti;
trust act apply alike to all persons and corporations
of the same class.~ The state is not, however, pre-
ciuded from classifying persons and things for the
purpose of legislation, provided the, classification is
reasonable.”
In Hollingsworth v; Texas Hay Association, (1923). 246
S;Wr 106s (writ refused), the ,Court had before it an agrerment made
under the Cooperative ,Marketing Act, which provides:
“No association,organized hereunder shall be
deemed to be’a combination in rest,raint of trade or
an illegal monoply; or an attempt to lessen competi-
tion or fix prices arbitrarily; nor shall ‘the market-
ing contracts or ag,re.e.ments, between the association ,,
and its’ members no.; ‘any agreements authorized in
this act be considered illegal, or in> restraint of
trade.”
The Court tersely disposed of. the matter by saying, “We
know of no constitutional r.eason why the public policy of the state
,,
may not be so declared.”
It was decided in State v.‘Standard Oil Co., ‘130 Tex. 313,
107 S.W. ~(2$) 550, ,that the ,exelnptiqn from the antitrust laws of
agreements made by persons engaged in agricultural pursuits did
note render invalid the: antitrust
,I laws under the “equal protection”.
clauses of the State and Pede,ral Constitutions. The majority view,
(Justices Sharp and Crits),:,stated that “The Legislature has the
right, within the exercise of its power, to make certain classifi-
cations of subjects and persons; but such cl,as,,sifications must not
be arbitrary or unreasonable<,” C,hief Justice Cureton, expressing
the minority view of the then three,-judge Court,, stated that to
exempt cooperative marketing associations from the antitrust laws
rendered such laws null and void because of the provision of Sec.
3, Art. I, of the Texas Constitution; which decla,res that “All free
men, when they form a social,compact, have equal rights. * * *”
‘.
‘The latest Texas case involving exemptions from the anti-
Hon. L. R. Pearson, Page 6, V-97
trust laws is Ex parte Tigner, 139 Tex. Crim. 452, 132 S.W. (2d)
885. Tigner was charged with conspiring to fix the retail price of
beer. His defense was that since the antitrust laws exclude those
dealing in agricultural products and livestock while in the hands of
the producer or raiser, the Texas antitrust Iaws were void. The
Court of Criminal Appeals refused to follow such contention, Andyup-
held the antitrust laws. After an exhaustive opinion, the Court con-
cluded:
“‘The question is whether the legislature, in deal-
ing with the economic policy with which the statute
is concerned, has adopted a classification which can
be said to have no reasonable relation to the promotion
of the general welfare. The equal protection clause of
the Fourteenth Amendment does not preclude the states
from resorting to classifications for the purpose of
legislation. * * * But the classification must be rea-
sonable, not arbitrary, and must rest upon some ground
of difference having a fair’and substantial relation to
the object of the legislation, so that all persons simi-
larly circumstanced shall be treated alike. In select-
ing some classes, and leaving out othersthe legislature,
while it keeps within this principle of classification, is
allowed wide discretion. * * * Before a court can in-
terfere with the exercise of the judgment of the legis-
lature in making a reasonable classification it must
be able to say ‘that there is no fair reason for the law
that would not require * * 4 its extension to others
whom it leaves untouched.’ ”
The above holding was affirmed by the U. S. Supreme
Court in Tigner v. Texas (1940), 310 U. Sl41, 1~30 A. L. R.
1321. Throughout the opinion, holding the exception to be rea-
sonable and not arbitrary, Justice Frankfurter: pointed out the
differences between agriculture and industry; that a different
concept of price and production policy existed for agriculture;
that farmers were widely scattered, modestly financed, and in-
ured to the habits of individualism; and that legislators may
well have thought t~hat combinations of farmers presented no
threat to the community.
While the above distinctions are not considered to be
the only items to be considered in determining whether a classi-
fication is reasonable or arbitrary, the reasoning of the Tigner
Hon. L. R. Pearson, Page 7, V-97
case is not applicable to the oil industry. Such industry is
highly organized, closely integrated, and of tremendous power
and wealth. Further, an exception in its favor would not be like
making a broad distinction between industry and agriculture, or
industry and labor, but would be carving out a particular classifi-
cation within industry inself. Would exemption to the oil industry
give “equal protection of the laws” to other industries subject
to prosecution if they make similar agreements 7 Is it fair and
reasonable to require prosecution of fishermen, retail druggist,
wholesale grocers, or persons engaged in the production of lumber
or sulphur, while the oil people are exempt? These are matters
the courts will look into in determining whether the exception
is reasonable or arbitrary.
In considering the reasonableness of the exceptions to
the antitrust laws made by H. B. 67, and also considering the
constitutional questions of freedom of contract and due process,
the courts will undoubtedly look to reasoning and holding of deci-
2ions which have upheld statutes and orders requiring compulsory
pooling of oil and gas properties. Four of the states bordering
Texas allow such compulsory pooling. The States are Louisiana
(R.S. 1940, p. 610; Act 157, Sec. 9a); New Mexico (Laws 1935,
Ch. 72, p. 137, Sec. 12; N. M. Stat. Anno. official ed. Sec. 69-
213); Oklahoma (Laws 1945, p. 157, Sec. 4, amending Title 52
Sec. 87, Laws 1941; and Arkansas (Laws 1939, Act 105, Sec. 15,
as amended by Act 86, 1941).
Without considering the effect on the antitrust laws,
forced pooling has been upheld in these states. Patterson v.
Stanolind 0. & G. Co. (1939), 305 U.S. 376, affirming the Okla-
homa Supreme Court, 77 P (2d) 83, noted with approval 16 Tex. L.
Rev. 597, 37 Mich. L. Rev. 955 and 2 La. L. Rev. 191; Placid Oil
Co, v. North Central Tex. Oil Co., (La. Sup. 1944), 19 So. (2d)
616; Hunter Co. v. McHugh, (La. Sup. 1942), 11 So. (2d) 495,
noted 16 Tulane L. Rev., 477, (Upholding a compulsory unitization
allowing only one gas well to each 320 acres); Croxton v. Oklahoma,
(1939). 97 P.(Zd) 11; Marrs v. City of Oxford, 32 F. (2d) 134
(CCA 8th 1929) cert. den. 280 U; S. 573. A three-ju$ge Federal
District Court upheld compulsory pooling under a city ordinance
in the South Houston field. Tysco Oil Co. v. Railroad Commission,
(1935) 12 F. Supp. 195.
The text writers are almost uniformly of the view that
pooling of natural resources is desirable from the standpoint of
Hon. L. R. Pearson, Page 8, v-97
conservation and the protection of correlative rights. 1 Summers,
Oil and Gas 275 Sec.104; Walker, “The Problems of the Small
Tract Under Spacing Regulations,” 17 Tex. L.Rev. (Bar No.) 157,
169; Ely, “The Conservation oft Oil,” 51 Harv.L.Rev. 1209,1235;
‘German, “Compulsory Unit Operations of Oil Pools,” 17 A.B.A.
Journal 393; and Moses, “Some Legal and Economical Aspects
of Unit. Operations, ” 21 Tex. L. Rev. 748, 765. Only the last men-
tioned article deals with the antitrust problem.
Under the above authorities, because of the peculiar
nature of oil and gas as natural resources, we are of the opinion
that an exception to the antitrust laws allowing voluntary pooling
by both lessors and lessees, based solely on the necessity of same
for conservation of natural resources, the prevention of waste,and
the protection of correlative rights, would probably be upheld by
the Courts as valid and reasonable; and as such, would not endanger
the validity of the antitrust laws. It is understood that such was
the only intent of the author of this Bill. From a discussion of
the Bill with the author we learn that its primary purpose is to
recognize as lawful any pooling agreements necessary for operators
(1) to have a unit large enough to meet Railroad Commission spacing
rules, (2) to establish units necessary to effect secondary recov-
eries through repressure methods, water flooding, and pressure
maintenance; and (3) to establish a co-operative gas re-cycling
system for a field in order to strip the wet gas and other hydro-
carbons, and return the dry gas to the sands by common input
wells.
If this Bill were limited to the above operations, and agree-
ments thereunder were made lawful only when reasonably necessary
for prevention of waste, conservation of oil and gas, and protection
of correlative rights, (such necessity to be determined by the Rail-
road Commission upon application, notice and hearing) then it is
our opinion that the Bill would not constitute an unreasonable or
arbitrary exception to the antitrust laws and would not invalidate
or endanger future enforcement thereof. (In this connection it
should be pointed out that both the Oklahoma and Arkansas statutes
allow or re,quire such pooling units only when reasonably ~“necessary”
to carry on conservation measures, prevent waste, and afford great-
er ultimate r’ecovery.)
However, as now written, H. B; 67 is much broader than
the above reasonable exception. It does not limit the making of
such agreements to instances when same are found necessary by
,Hon. L. R. Pearson, Page 9, V-97
.i j .:,,,,.
the Ra~iiroad Commission. Concerning the making of the agreements,
H. B. 67 simply provides: So,
“* * * Therefore, it shall.be lawful for two~or
more persons owning, claiming, or controlling produc-
tion, leases, royalties, or’other inte~rests in separate
properties in the same oil field, gas field, or oil and
gas field, when it appears from geologic or other data
that such properties ar’e underlaid by one or. more com-
mon accumulations of oil or gas, or both, to enter into
and perform agreements for the purpose of b~ringing about
cooperative explorations, developm~ent, and operations of
all or any part or parts of such field. * * *”
The provision for Railroad Commission approval before the
agreement becomes operative ‘requires a mere finding that the agree-
ment will prevent waste or “tend” to promote conservation. It does
not require a finding that such unitization is reasonably necessary
for conservation.
In other words, to be a reasonable exception from the anti-
trust laws so as not to invalidate them; in this instance the excep-
tion should be necessary in the public interest, and should not in-
clude or permit,such agreements merely for the convenience of or
monetary savings to the oil and gas producers. It is believed that,
as written, some of the provisions of Hi B. 67 could and would be
used,primarily for the convenience and profit of lessees without any
necessary relation to oil and gas conservation.
For instance, H. B; 67 would ,allow pooling agreements for
exploration of a prospective field evenbefore a test well is drilled.
Surely it would save money and restrict competition to allow oil
operators to conduct a joints geophystcal exploration and to drill the
first test well as a joint project, but can it be said that same is
reasonably necessary to promote conservation when, at the time, oil
or gas has not even been discovered? ,.
Another instance: As written, H. S&7 would-permit the
convenience of oil and gas producers to be served by agreeing to
limit production and to hold an. entire field under lease through
production from only’one well (or a--limited ;n&-ober of wells), with
conservati’o n of resources ~8s merely an incidental or secondary
consideration.
,.. .>o .‘). Z’
For the reasons stated, it is our opinion that the Bill as
Hon. L. R. Pearson, Page 10, V-97
now written provides unreasonable exceptions which would serious-
ly endanger. the validity of the antitrust laws of Texas when applied
to other persons or corporations.
With regard to the enforceability of the antitrust laws,
it is unquestionable that this statute will make the task of this
office infinitely more difficult. For example, if the oil industry
were charged with fixing the price of gas throughout the State,
the condemning proof would be extremely difficult where such
companies may legally combine within individual fields for the
purpose of marketing and fixing the price of gas.
In that connection, your attention is directed to the case
of Shamrock Oil b Gas Corp. v. Coffee, 140 F. (Zd) 409, (CCA 5th
1944) cert. den. 323 II. S. 737. The lease contract in that case pro-
vided that the lessor should receive the “market price at the well
of l/8 of the gas.” There was but one purchaser in the field who
purchased the gas; and it bought from all wells at a price between
l/2 and 4/5 a cent per thousand feet, thus establishing “a market
pric~e in the field.” Because many products, butane, propane, etc.
were made from such gas, the proof showed that the gas was reason-
ably worth from 1 to 1.4 cents. The Court held that the lessor was
limited under his contract to the lower market price offered and paid
by the pipe line company, “in the absence of collusion, combination,
conspiracy, or combination in restraint of trade among the buyers
fixing the market price. ” H. B. 67 says agreements as to marketing
of gas by oil companies and others within the field shall not be de-
clared to be in violation of the antitrust laws. Here again the diffi-
culty of prosecuting persons or companies who combined to fix the
price paid becomes obvious.
If the oil and gas industry is exempt, it would be under-
standably harder to get a conviction against another industry which
is prosecuted for making an agreement which the oil and gas companies
can legally make. Courts and juries would understandably question the
prosecution of merchants where farmers, laborers,and now the oil
industry are exempt.
Before closing, it must be mentioned that H. B. 67 express-
ly repeals Art, 5368b (Acts 49th Leg., p. 507, c. 309), authorizing
the Commissioner of the General Land Office to enter into pooling
agreements and fixing a minimum royalty. H. B. 67 rewrites this
statute omitting the provisions for the minimum royalty to the State.
Hon.’ L. R. Pearson, Page 11, V-97
H. B. 67 also repeals Art. 4192a (Acts 49th Leg., p. 117, c.
80) allowing guardians to enter into pooling agreements. The pro-
posed legislation rewrites this statute and expands it to include ad-
ministrators, executors and other fiduciaries administering estates.
SUMMARY
H. B. 67 authorizing unitization agreements for
cooperative explorations, development, and ope’ration
of oil and gas properties, and the marketing ‘of gas,
without the requirement that the same be necessary
for the prevention of waste and conservation of natural
resources, if enacted as written, would constitute a
serious threat to the antitrust laws of this State.
Its enactment as written would make more difficult
the enforcement of the antitrust laws.
Yours very truly,
ATTORNEYGENERALOF TEXAS
BY
oe R. Greenhill
Assistant
JRG/lh
The foregoing opinion was considered and approved in a
conference composed of the Attorney General, First Assistant
Attorney General Fagan Dickson, and Assistant Attorneys General
Ocie Speer, James D. Smullen, Ned McDaniel, Elton Hyder, Jr.
and J. A. Amis, Jr.
g~D&&4
Chairman of the Conference