Burford v. Sun Oil Company/Opinion of the Court

In this proceeding brought in a federal district court, the Sun Oil Co. attacked the validity of an order of the Texas Railroad Commission granting the petitioner Burford a permit to drill four wells on a small plot of land in the East Texas oil field. Jurisdiction of the federal court was invoked because of the diversity of citizenship of the parties, and because of the Companies' contention that the order denied them due process of law. There is some argument that the action is an 'appeal' from the State Commission to the federal court since an appeal to a State court can be taken under relevant Texas statutes; but of course the Texas legislature may not make a federal district court, a court of original jurisdiction, into an appellate tribunal or otherwise expand its jurisdiction,  and the Circuit Court of Appeals in its decision correctly viewed this as a simple proceeding in equity to enjoin the enforcement of the Commission's order.

Although a federal equity court does have jurisdiction of a particular proceeding, it may, in its sound discretion, whether its jurisdiction is invoked on the ground of diversity of citizenship or otherwise, 'refuse to enforce or protect legal rights, the exercise of which may be prejudicial to the public interest'; for it 'is in the public interest that federal courts of equity should exercise their discretionary power with proper regard for the rightful independence of state governments in carrying out their domestic policy.'  While many other questions are argued, we find it necessary to decide only one: Assuming that the federal district court had jurisdiction, should it, as a matter of sound equitable discretion, have declined to exercise that jurisdiction here?

The order under consideration is part of the general regulatory system devised for the conservation of oil and gas in Texas, an aspect of 'as thorny a problem as has challenged the ingenuity and wisdom of legislatures.' Railroad Commission v. Rowan & Nichols Oil Co., 310 U.S. 573, 579, 60 S.Ct. 1021, 1023, 84 L.Ed. 1368. The East Texas field, in which the Burford tract is located, is one of the largest in the United States. It is approximately forty miles long and between five and nine miles wide, and over 26,000 wells have been drilled in it. Oil exists in the pores and crevices of rocks and sand and moves through these channels. A large area of this sort is called a pool or reservoir and the East Texas field is a giant pool. The chief forces causing oil to move are gas and water, and it is essential that the pressures be maintained at a level which will force the oil through wells to the surface. As the gas pressure is dissipated, it becomes necessary to put the well 'on the pump' at great expense; and the sooner the gas from a field is exhausted, the more oil is irretrievably lost. Since the oil moves through the entire field, one operator can not only draw the oil from under his own surface area, but can also, if he is advantageously located, drain oil from the most distant parts of the reservoir. The practice of attempting to drain oil from under the surface holdings of others leads to offset wells and other wasteful practices; and this problem is increased by the fact that the surface rights are split up into many small tracts. There are approximately nine hundred operators in the East Texas field alone.

For these, and many other reasons based on geologic realities, each oil and gas field must be regulated as a unit for conservation purposes. Compare Railroad Commission v. Rowan & Nichols Oil Co., 311 U.S. 570, 574, 61 S.Ct. 343, 345, 85 L.Ed. 358. The federal government, for the present at least, has chosen to leave the principal regulatory responsibility with the states, but does supplement state control. While there is no question of the constitutional power of the State to take appropriate action to protect the industry and protect the public interest, Ohio Oil Co. v. Indiana, 177 U.S. 190, 20 S.Ct. 576, 44 L.Ed. 729; Champlin Refining Co. v. Corporation Commission, 286 U.S. 210, 52 S.Ct. 559, 76 L.Ed. 1062, 86 A.L.R. 403, the State's attempts to control the flow of oil and at the same time protect the interest of the many operators have from time to time been entangled in geological-legal problems of novel nature.

Texas interests in this matter are more than that very large one of conserving gas and oil, two of our most important natural resources. It must also weigh the impact of the industry on the whole economy of the state and must consider its revenue, much of which is drawn from taxes on the industry and from mineral lands preserved for the benefit of its educational and eleemosynary institutions. To prevent 'past, present, and imminent evils' in the production of natural gas, a statute was enacted 'for the protection of public and private interests against such evils by prohibiting waste and compelling ratable production.' The primary task of attempting adjustment of these diverse interests is delegated to the Railroad Commission which Texas has vested with 'broad discretion' in administering the law.

The Commission, in cooperation with other oil producing states, has accepted State oil production quotas and has undertaken to translate the amount to be produced for the State as a whole into a specific amount for each field and for each well. These judgments are made with due regard for the factors of full utilization of the oil supply, market demand, and protection of the individual operators, as well as protection of the public interest. As an essential aspect of the control program, the State also regulates the spacing of wells. The legislature has disavowed a purpose of requiring that 'the separately owned properties in any pool (should) be unitized under one management, control or ownership' and the Commission must thus work out the difficult spacing problem with due regard for whatever rights Texas recognizes in the separate owners to a share of the common reservoir. At the same time it must restrain waste, whether by excessive production or by the unwise dissipation of the gas and other geologic factors that cause the oil to flow.

Since 1919 the Commission has attempted to solve this problem by its Rule 37. The rule provides for certain minimum spacing between wells, but also allows exceptions where necessary 'to prevent waste or to prevent the confiscation of property.' The prevention of confiscation is based on the premises that, insofar as these privileges are compatible with the prevention of waste and the achievement of conservation, each surface owner should be permitted to withdraw the oil under his surface area, and that no one else can fairly be permitted to drain his oil away. Hence the Commission may protect his interest either by adjusting his amount of production upward, or by permitting him to drill additional wells. 'By this method each person will be entitled to recover a quantity of oil and gas substantially equivalent in amount to the recoverable oil and gas under his land.'

Additional wells may be required to prevent waste as has been noticed, where geologic circumstances require immediate drilling: 'The term 'waste', as used in oil and gas Rule 37, undoubtedly means the ultimate loss of oil. If a substantial amount of oil will be saved by the drilling of a well that otherwise would ultimately be lost, the permit to drill such well may be justified under one of the exceptions provided in Rule 37 to prevent waste.' Gulf Land Co. v. Atlantic Refining Co., 134 Tex. 59, 70, 131 S.W.2d 73, 80.

The delusive simplicity with which these principles of exception to Rule 37 can be stated should not obscure the actual nonlegal complexities involved in their application. While the surface holder may, subject to qualifications noted, be entitled under current Texas law to the oil under his land, there can be no absolute certainty as to how much oil actually is present, Railroad Comm. v. Rowan & Nichols Oil Co., 311 U.S. 570, 576, 61 S.Ct. 343, 346, 85 L.Ed. 358, and since the waste and confiscation problems are as a matter of physical necessity so closely interrelated, decision of one of the questions necessarily involves recognition of the other. The sheer quantity of exception cases makes their disposition of great public importance. It is estimated that over two-thirds of the wells in the East Texas field exist as exceptions to the rule, and since each exception may provoke a conflict among the interested parties, the volume of litigation arising from the administration of the rule is considerable. The instant case arises from just such an exception. It is not peculiar that the state should be represented here by its Attorney General, for cases like this, involving 'confiscation', are not mere isolated disputes between private parties. Aside from the general principles which may evolve from these proceedings, the physical facts are such that an additional permit may affect pressure on a well miles away. The standards applied by the Commission in a given case necessarily affect the entire state conservation system. Of far more importance than any other private interest is the fact that the over-all plan of regulation, as well as each of its case by case manifestations, is of vital interest to the general public which must be assured that the speculative interests of individual tract owners will be put aside when necessary to prevent the irretrievable loss of oil in other parts of the field. The Commission in applying the statutory standards of course considers the Rule 37 cases as a part of the entire conservation program with implications to the whole economy of the state.

With full knowledge of the importance of the decisions of the Railroad Commission both to the State and to the oil operators, the Texas legislature has established a system of thorough judicial review by its own State courts. The Commission orders may be appealed to a State district court in Travis County, and are reviewed by a branch of the Court of Civil Appeals and by the State Supreme Court. While the constitutional power of the Commission to enforce Rule 37 or to make exceptions to it is seldom seriously challenged, Brown v. Humble Oil & Ref. Co., 126 Tex. 296, 307, 83 S.W.2d 935, 87 S.W.2d 1069, 99 A.L.R. 1107, 101 A.L.R. 1393, the validity of particular orders from the standpoint of statutory interpretation may present a serious problem, and a substantial number of such cases have been disposed of by the Texas courts which alone have the power to give definite answers to the questions of State law posed in these proceedings.

In describing the relation of the Texas court to the Commission no useful purpose will be served by attempting to label the court's position as legislative, Prentis v. Atlantic Coast Line Co., 211 U.S. 210, 29 S.Ct. 67, 53 L.Ed. 150; Keller v. Potomac Elec. Co., 261 U.S. 428, 43 S.Ct. 445, 67 L.Ed. 731, or judicial, Bacon v. Rutland Railroad Co., 232 U.S. 134, 34 S.Ct. 283, 58 L.Ed. 538-suffice it to say that the Texas courts are working partners with the Railroad Commission in the business of creating a regulatory system for the oil industry. The Commission is charged with principal responsibility for fact finding and for policy making and the courts expressly disclaim the administrative responsibility, Gulf Land Co. v. Atlantic Refining Co., 134 Tex. 59, 131 S.W.2d 73, but on the other hand, the orders of the Commission are tested for 'reasonableness' by trial de novo before the court, Railroad Commission v. Shell Oil Co., 139 Tex. 66, 76-80, 161 S.W.2d 1022, and the Court may on occasion make a careful analysis of all the facts of the case in reversing a Commission order. Railroad Commission v. Gulf Production Co., 134 Tex. 122, 132 S.W.2d 254. The court has fully as much power as the Commission to determine particular cases, since after trial de novo it can either restrain the leaseholder from proceeding to drill, or, if the case is appropriate, can restrain the Commission from interfering with the leaseholder. The court may even formulate new standards for the Commission's administrative practice and suggest that the Commission adopt them. Thus, in the Shell Oil case, supra, at page 73 of 139 Tex., at page 1026 of 161 S.W.2d the Court took the responsibility of 'laying down some standard to guide the Commission in the exercise of its discretion' in Rule 37 cases; and in Brown v. Humble Oil Co., supra, 126 Tex. 312, 83 S.W.2d 944, 99 A.L.R. 1107, 101 A.L.R. 1393, the Court explicitly suggested a revision in Rule 37.

To prevent the confusion of multiple review of the same general issues, the legislature provided for concentration of all direct review of the Commission's orders in the State district courts of Travis County. The Texas courts have authoritatively declared the purpose of this restriction: 'If an order of the commission, lawful on its face, can be collaterally attacked in the various courts and counties of the state on grounds such as those urged in the instant case, interminable confusion would result.' Texas Steel Co. v. Fort Worth and D.C. Ry. Co., 120 Tex. 597, 604, 40 S.W.2d 78, 82. To permit various state courts to pass upon the Commission's rules and orders, 'would lead to intolerable confusion. If all district courts of this state had jurisdiction of such matters, different courts of equal dignity might reach different and conflicting conclusions as to the same rule. Manifestly, the jurisdictional provision under discussion was incorporated in the act for the express purpose of avoiding such confusion.' Alpha Petroleum Co. v. Terrell et al., 122 Tex. 257, 273, 59 S.W.2d 364, 371. Time and experience, say the Texas courts, have shown the wisdom of this rule. Concentration of judicial supervision of Railroad Commission orders permits the state courts, like the Railroad Commission itself, to acquire a specialized knowledge which is useful in shaping the policy of regulation of the ever-changing demands in this field. At the present time, less than ten per cent of these cases come before the federal district court.

The very 'confusion' which the Texas legislature and Supreme Court feared might result from review by many state courts of the Railroad Commission's orders has resulted from the exercise of federal equity jurisdiction. As a practical matter, the federal courts can make small contribution to the well organized system of regulation and review which the Texas statutes provide. Texas courts can give fully as great relief, including temporary restraining orders, as the federal courts. Delay, misunderstanding of local law, and needless federal conflict with the State policy, are the inevitable product of this double system of review. The most striking example of misunderstanding has come where the federal court has flatly disagreed with the position later taken by a State court as to State law. See MacMillan v. Railroad Commission, D.C., 51 F.2d 400; Railroad Comm. v. MacMillan, 287 U.S. 576, 53 S.Ct. 223, 77 L.Ed. 505, and Danciger Oil and Refining Co. v. Railroad Commission, Tex.Civ.App., 49 S.W.2d 837; Id., 122 Tex. 243, 56 S.W.2d 1075. In those cases, the federal court attributed a given meaning to the state statute which went to the heart of the control program. The Court of Civil Appeals disagreed, but before ultimate review could be had either in Texas or here, the legislature amended its statutes so that the cases became moot. Had the Texas Civil Appeals decision come first, it would have been unnecessary to make the changes which were made in an effort to stay within the limit thought by the Governor of Texas to have been set by the tone of the federal court's opinion. The Texas legislature later changed the law back to its original state, as clear an example of waste motion as can be imagined. The federal court has been called upon constantly to determine whether the Railroad Commission has acted within the scope of statutory authority, while the important constitutional issues have, as the federal court has repeatedly said, been fairly well settled from the beginning.

These federal court decisions on state law have created a constant task for the Texas Governor, the Texas legislature, and the Railroad Commission. The Governor of Texas, as has been noted above, felt called upon to forge his oil program in the light of the remotest inferences of federal court opinions. In one instance he thought it necessary to declare martial law. Special sessions of the legislature have been occupied with consideration of federal court decisions. Legislation passed under the circumstances of the strain and doubt created by these decisions was necessarily unsatisfactory. The Railroad Commission has had to adjust itself to the permutations of the law as seen by the federal courts. The most recent example was in connection with the Rowan and Nichols case in which the Commission felt compelled to adopt a new proration scheme to comply with the demands of a federal court decision which was reversed when it came to this Court. 311 U.S. 570, 572, 61 S.Ct. 343, 344, 85 L.Ed. 358.

As has been noted the federal court cases have dealt primarily with the interpretation of state law, some of it state law fairly remote from oil and gas problems. The instant case raised a number of problems of no general significance on which a federal court can only try to ascertain state law. For example, we are asked to determine whether a previous Travis county district court decision makes this case res adjudicata and whether another case pending in Travis county deprived the Commission of jurisdiction to consider Burford's application. The existence of these problems throughout the oil regulatory field creates a further possibility of serious delay which can injury the conservation program, for under our decision in Railroad Commission v. Pullman Co., 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971, it may be necessary to stay federal action pending authoritative determination of the difficult state questions.

The conflict between federal courts and Texas has lessened appreciably in recent years primarily as a result of the decisions in the Rowan and Nichols case. 310 U.S. 573, 60 S.Ct. 1021, 84 L.Ed. 1368; 311 U.S. 614, 61 S.Ct. 66, 85 L.Ed. 390; 311 U.S. 570, 61 S.Ct. 343, 85 L.Ed. 358. In those cases we assumed that the principal issue in the review of Railroad Commission orders was whether the Commission had confined itself within the boundaries of due process of law, and held that any special relief provided by state statutes must be pursued in a state court. It is now argued that under the decision of the Texas Supreme Court in Railroad Commission v. Shell Oil Co., 139 Tex. 66, 161 S.W.2d 1022, the courts, whether federal or state, are required to review the Commission's order not for constitutional validity, but for compliance with a standard of 'reasonableness' under the state statute which, it is said, is different from the constitutional standard of due process.

The whole cycle of federal-state conflict cannot be permitted to begin again by acceptance of this view. Insofar as we have discretion to do so, we should leave these problems of Texas law to the State court where each may be handled as 'one more item in a continuous series of adjustments.' Rowan and Nichols, supra, 310 U.S. at page 584, 60 S.Ct. at page 1025, 84 L.Ed. 1368.

These questions of regulation of the industry by the State administrative agency, whether involving gas or oil prorationing programs or Rule 37 cases, so clearly involves basic problems of Texas policy that equitable discretion should be exercised to give the Texas courts the first opportunity to consider them. 'Few public interests have a higher claim upon the discretion of a federal chancellor and the avoidance of needless friction with state policies, * *  *. These cases reflect a doctrine of abstention appropriate to our federal system whereby the federal courts, 'exercising a wise discretion', restrain their authority because of 'scrupulous regard for the rightful independence of the state governments' and for the smooth working of the federal judiciary * *  *. This use of equitable powers is a contribution of the courts in furthering the harmonious relation between state and federal authority without the need of rigorous congressional restriction of those powers.' Railroad Commission v. Pullman Co., supra, 312 U.S. 500, 501, 61 S.Ct. 645, 85 L.Ed. 971.

The state provides a unified method for the formation of policy and determination of cases by the Commission and by the state courts. The judicial review of the Commission's decisions in the state courts is expeditious and adequate. Conflicts in the interpretation of state law, dangerous to the success of state policies, are almost certain to result from the intervention of the lower federal courts. On the other hand, if the state procedure is followed from the Commission to the State Supreme Court, ultimate review of the federal questions is fully preserved here. Cf. Matthews v. Rodgers, 284 U.S. 521, 52 S.Ct. 217, 76 L.Ed. 447. Under such circumstances, a sound respect for the independence of state action requires the federal equity court to stay its hand.

The decision of the Circuit Court of Appeals is reversed and the judgment of the District Court dismissing the complaint is affirmed for the reasons here stated.

It is so ordered.

Judgment of Circuit Court of Appeals reversed and judgment of District Court affirmed.