EXXON CORP. V. EAGERTON, 462 U. S. 176 (1983)

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U.S. Supreme Court

Exxon Corp. v. Eagerton, 462 U.S. 176 (1983)

Exxon Corp. v. Eagerton

No. 81-1020

Argued February 22, 1983

Decided June 8, 1983*

462 U.S. 176


An Alabama statute imposes a severance tax on oil and gas extracted from wells located in the State. In 1979, a statute (Act 79-434) was enacted which increased the tax, exempted royalty owners from the increase, and prohibited producers from passing on the increase to consumers. Appellant producers were parties to preexisting contracts that provided for allocation of severance taxes among themselves, the royalty owners, and any nonworking interests. The contracts also required the purchasers to reimburse appellants for severance taxes paid. After paying the increase in the severance tax under protest, appellants and other producers filed suit in an Alabama state court, seeking a declaratory judgment that Act 79-434 was unconstitutional and a refund of the taxes paid. Concluding that both the royalty owner exemption and the pass-through prohibition violated the Equal Protection Clause of the Fourteenth Amendment and the Contract Clause, and that the pass-through prohibition was also preempted by the Natural Gas Policy Act of 1978 (NGPA), the trial court held Act 79-434 invalid in its entirety and ordered appellee Alabama Commissioner of Revenue to refund the taxes. The Alabama Supreme Court reversed.


1. The pass-through prohibition of Act 79-434 was preempted by federal law insofar as it applied to sales of gas in interstate commerce, but not insofar as it applied to sales of gas in intrastate commerce. Pp. 462 U. S. 180-187.

(a) The Natural Gas Act, which was enacted in 1938, was intended to occupy the field of wholesale sales of natural gas in interstate commerce. Alabama's pass-through prohibition trespassed upon the authority of the Federal Energy Regulatory Commission (FERC) under that Act to regulate the wholesale prices of natural gas sold in interstate commerce, for the prohibition bars gas producers from increasing their prices to pass on a particular expense -- the increase in the severance tax -- to their purchasers. Whether or not producers should be permitted

Page 462 U. S. 177

to recover this expense from their purchasers is a matter within the sphere of FERC's regulatory authority. Pp. 462 U. S. 184-186.

(b) Although the NGPA extended federal authority to control natural gas prices to the intrastate market, Congress also provided that this extension did not deprive the States of the power to establish a price ceiling for intrastate sales at a level lower than the federal ceiling. Since a State may establish a lower price ceiling, it may also impose a severance tax and forbid sellers to pass it through to their customers. Pp. 462 U. S. 186-187.

2. The royalty owner exemption of Act 79-434 does not violate the Contract Clause, since it did not nullify any contractual obligation of which appellants were the beneficiaries. The exemption provides only that the incidence of the severance tax increase shall not fall on royalty owners, and nowhere states that producers may not shift the burden of the increase to royalty owners. Pp. 462 U. S. 187-189.

3. Nor does the pass-through prohibition of Act 79-434 violate the Contract Clause. While the prohibition affected contractual obligations of which appellants were the beneficiaries, it does not constitute a "Law impairing the Obligations of Contracts" within the meaning of the Contract Clause. The prohibition imposed a generally applicable rule of conduct, the main effect of which was to shield consumers from the burden of the tax increase. Its effect on existing contracts permitting producers to pass the increase through to consumers was only incidental. Cf. Producers Transportation Co. v. Railroad Comm'n of California, 251 U. S. 228. Pp. 462 U. S. 189-194.

4. Neither the pass-through prohibition nor the royalty owner exemption of Act 79-434 violates the Equal Protection Clause. Both measures pass muster under the standard of rationality applied in considering equal protection challenges to statutes regulating economic and commercial matters. The pass-through prohibition plainly bore a rational relationship to the State's legitimate purpose of protecting consumers from excessive prices. Similarly, the Alabama Legislature could have reasonably determined that the royalty owner exemption would encourage investment in oil or gas production. Pp. 462 U. S. 195-196.

404 So.2d 1, affirmed in part, reversed in part, and remanded.

MARSHALL, J., delivered the opinion for a unanimous Court.

Page 462 U. S. 178

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