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 cooperative exploration, development, 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 antitrust 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 controlling 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, development, 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, repressuring, and pressure maintenance; for the storage of gas; for the 

marketing of gas, but not the marketing of oil; for the joint extraction of casinghead gas and the return of the gas to the earth. 

The bill allows agreements “for the equitable distribution 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-agreement 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 ~approved by the Railroad Commission, after notice and hearing, after 

a finding that they will prevent waste, or “tend” to promote conservation, and will protect correlative rights. 

Section 5 provides that neither the making nor performance of such agreements shall be unlawful or violate the antitrust 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 competition 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 commodity * * * * 
Hon. L. OR. Pearson, Page 3, V-97 

“6. To.regulate;fix or limit the: qutput of, any 

article or commodity which may be manufactured, 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 antitrust 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 unrestricted competition. H. B. 67 makes such agreements lawful when 

they are made by persons “owning:,~ claiming, or controlling production, 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 established. 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 antitrust, 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 agreements 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 effect 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 approval 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 construed to violate the antitrust statutes. These laws have not 

been tested on their antitrust provisions. 

“Monopolies are contrary to the. genius of a free government, and shall never be allowed:” Tex. C,onstitution, Art. I, Section 2,6. Whether the subject bill will create m,onopolies cannot 

be determined at this time. If it creates monopolies, the statute 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 antitrust 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 Legislature 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 exception 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 exceptions. 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, preciuded 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 competition or fix prices arbitrarily; nor shall ‘the marketing 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 laws under the “equal protection”. ,I 

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 classifications 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, Andy upheld the antitrust laws. After an exhaustive opinion, the Court concluded: 

“‘The question is whether the legislature, in dealing 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 reasonable, 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 similarly circumstanced shall be treated alike. In selecting some classes, and leaving out othersthe legislature, 

while it keeps within this principle of classification, is 

allowed wide discretion. * * * Before a court can interfere with the exercise of the judgment of the legislature 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 reasonable 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 inured 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 classification 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 classification 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 deci2ions 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 Oklahoma 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 mentioned 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 recoveries 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 hydrocarbons, and return the dry gas to the sands by common input 

wells. 

If this Bill were limited to the above operations, and agreements 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 Railroad 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 greater 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 production, 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 common 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 agreement 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 antitrust laws so as not to invalidate them; in this instance the exception should be necessary in the public interest, and should not include 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 seriously 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 provided 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 reasonably 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 declared to be in violation of the antitrust laws. Here again the difficulty 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 understandably 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 expressly 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 proposed legislation rewrites this statute and expands it to include administrators, 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 

JRG/lh 

BY 

oe R. Greenhill 

Assistant 

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