The opinion
IN THE UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF ARKANSAS
CENTRAL DIVISION
FLYWHEEL ENERGY PRODUCTION
LLC; VAN BUREN ENERGY
PRODUCTION LLC; RAZORBACK
PRODUCTION LLC; and CAER
ENERGY LLC PLAINTIFFS
v. No. 4:25-cv-616-DPM
ALAN YORK, in his official capacity as
the Director of the Arkansas Oil and Gas
Commission; PULOMA PROPERTIES
LLC; and RICHARD PULOMA DEFENDANTS
ORDER
The question presented is whether to put Arkansas Act 1024
of 2025 on hold while this constitutional challenge to it proceeds.
The General Assembly explained the Act’s purpose in its title: “An Act
to amend the law regarding oil and gas production and conservation;
to clarify the allocation of production and cost following integration
order by defining ‘net proceeds’; to address obligations of operators
and working interest owners to mineral owners; and for other
purposes.”* The Act will go into effect on August 5th. It is directed at
natural gas production in the Fayetteville Shale. The main operators
(the entities who operate the wells) and working interest owners
* All capitals eliminated and emphasis removed.
(the entities who hold the right by lease to develop and sell the natural
gas) contend that the Act violates the Contract Clause, the Takings
Clause, and the Due Process Clause of the U.S. Constitution, and some
similar clauses of the Arkansas Constitution. Unless it specifies
otherwise, the Court will refer to this overlapping group of operators
and working interest owners as Flywheel, the lead plaintiff. Flywheel
presses these constitutional claims against the Director of the Arkansas
Oil and Gas Commission in his official capacity and some mineral
owners, which the Court will call Puloma. Whether Mr. Puloma and
his company should stay in the case is another interesting threshold
question, which the Court defers to focus on the deep issue, a “who
must pay some expenses” question.
In integrated drilling units, may Flywheel deduct a share of
certain post-production expenses (such as for gathering, treating,
and compressing the natural gas) from the statutory royalty—the first
one-eighth of well proceeds? In an appeal after a state administrative
proceeding, the Arkansas Court of Appeals answered “no.”
Flywheel Energy Production, LLC v. Arkansas Oil & Gas Commission,
2023 Ark. App. 483, at 22, 678 S.W.3d 851, 863. The Arkansas Supreme
Court denied a petition to review that decision. In a series of cases,
this Court (speaking through Brother Rudofsky) answered “yes.”
E.g., Doc. 73 in Hurd v. Flywheel Energy Production, LLC, Case No.
4:21-cv-1207-LPR (E.D. Ark. 24 October 2024).∗∗ This Court answered
only after the Arkansas Supreme Court had declined to accept a
certified question about the current version of the controlling statute.
Several of these Hurd-progeny cases are on appeal.
After two similar but failed legislative efforts in recent years,
the General Assembly then passed the now-challenged Act 1024.
The Act answered the deep question with “it depends”—follow the
underlying mineral leases. Act of 22 April 2025, No. 1024, § 1,
2025 Ark. Acts (amending Ark. Code Ann. § 15-72-305). But this answer
is mostly a “no” for two reasons. First, the AOGC’s form lease (which
covers rights where there is no lease), doesn’t allow these deductions.
York Exhibit 1 at 27. Second, the testimony at the preliminary injunction
hearing established that many of the executed leases in the Fayetteville
Shale limit or forbid deductions of post-production costs from royalties.
*
Some background and some nuance. The current version of the
governing statute, Arkansas Code Annotated § 15-72-305, dates from
1985. Development of the natural gas in the Arkoma Basin was then in
full swing. Integration of drilling units in each section of land had been
∗∗ See also Flowers v. Flywheel Energy Production, LLC, Case No. 4:21-cv-330-
LPR; Eubanks v. Flywheel Energy Production, LLC, Case No. 4:21-cv-329-LPR;
Oliger v. Flywheel Energy Production, LLC, Case No. 4:20-cv-1146-LPR;
Pennington v. BHP Billiton Petroleum (Fayetteville), LLC, Case No. 4:20-cv-178-
LPR.
part of Arkansas law since the 1930s. The unit’s operator could develop
the whole with royalties paid to all owners of mineral interests, whether
an owner had leased his rights or not. But, what if one or more working
interest owners (entities that had leased mineral rights) decided for
some reason not to sell its share of the gas produced in a given month?
No sale, no income—either to the working interest owner or,
downstream, to the owner of the mineral rights. This system did not
sit well at the coffee shop. Say there were four mineral owners
(often neighboring landowners) in a section. All see the wells pumping.
Two owners could be smiling about their healthy royalty checks, while
the other two would have empty pockets.
The General Assembly’s answer was the one-eighth statutory
royalty. By operation of law, every operator had to distribute the first
one-eighth of the “net proceeds” received from the monthly sale of gas
to all the mineral owners in the integrated unit. Ark. Code Ann.
§ 15-72-305(a)(3). Everyone shared in the first fruits. The statute,
though, didn’t define net proceeds. For the leased minerals,
the operator distributed these proceeds for the working interest owner.
The statute did define what each working interest owner was obligated
to pay each operator: “one-eighth (1/8) of the revenue realized or
royalty moneys from gas sales computed at the mouth of the well,
less all lawful deductions, including, but not limited to, all federal and
state taxes levied upon the production or proceeds . . ..” Ark. Code
Ann. § 15-72-305(a)(3)(B)(i). According to expert testimony received at
the hearing from Michael Callan, who has worked in the Arkansas oil
and gas industry for four decades, circa 1985 all or almost all leases
were net leases. The operators and working interest owners could and
did deduct expenses. Little if any daylight existed between the
statutory royalty obligation on the first one-eighth and the contractual
obligation on any royalty due under a lease. In general, the 1985 fix
seemed to satisfy.
Fast forward fifteen or so years to the early 2000s. The Fayetteville
Shale play began. And there was a hotly competitive scramble to lease
up mineral rights. Unlike in the Arkoma Basin, many of the resulting
leases were gross leases, which specified that working interest owners
(the lessees) could not deduct some or all expenses from the royalties.
In the early and middle years of the Fayetteville Shale play, most of
the biggest players (such as Flywheel’s predecessor in interest,
Southwestern) did not deduct post-production expenses from the
one-eighth statutory royalty. Another big player, XTO, did. (XTO was
Van Buren Energy Production’s predecessor in interest). As the play
matured, the working interests have been sold and resold.
Southwestern Energy, Chesapeake, and XTO are no longer involved.
When Flywheel came onto the scene in 2018, things changed.
Various post-production expenses have been deducted from the first
one-eighth royalty payments. Lawsuits, and Act 1024, resulted.
Given the expedited proceedings, the Court denies Flywheel’s mid-
hearing motion, Doc. 53, to exclude video excerpts from the legislative
history. McGriff Insurance Services, Inc. v. Madigan, 2022 WL 16709050,
at *2 (W.D. Ark. 4 November 2022).
*
Now back to the pressing issue. Is Flywheel entitled to a
preliminary injunction of the new Act while it litigates its constitutional
challenges to that Act?
First, the parties agree on the legal standard. The familiar
Dataphase factors, as modified by later precedent, apply. Dataphase
Systems, Inc. v. C.L. Systems, Inc., 640 F.2d 109, 114 (8th Cir. 1981)
(en banc); Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7,
20–22 (2008); Planned Parenthood Minnesota, North Dakota, South Dakota
v. Rounds, 530 F.3d 724, 731–32 (8th Cir. 2008) (en banc). The most
important consideration is whether Flywheel is likely to succeed on the
merits. To stop the implementation of a law duly enacted by the
people’s representatives, Flywheel must show that it is likely to prevail
on one or more of its constitutional claims. Rounds, 530 F.3d at 731–32.
This greater burden honors the law’s presumption that the statute is
constitutional.
Second, the parties likewise agree that the unamended version of
Ark. Code. Ann. § 15-72-305, and other applicable statutes,
are embedded in their mineral leases and other contracts. “This Court
has said that the laws which subsist at the time and place of the making
of a contract, and where it is to be performed, enter into and form a part
of it, as if they were expressly referred to or incorporated in its terms.”
Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 429–30 (1934)
(Hughes, C.J.) (quotation omitted); see also Woodend v. Southland Racing
Corp., 337 Ark. 380, 384, 989 S.W.2d 505, 507 (1999).
Third, the current version of Ark. Code. Ann. § 15-72-305 contains
a latent ambiguity. The “net proceeds” an operator must pay are
undefined. The category is clear but its contents are not. The related
provision about what a working interest owner must pay an operator
clarifies some things but not every thing: “all lawful deductions”
may be made, “including, but not limited to,” state and federal taxes.
Ark. Code. Ann. § 15-72-305(a)(3)(B)(i). The statute’s approved list of
deductions specifies taxes. The list includes other things, too—lawful
deductions. But what else is on the General Assembly’s approved list?
The statute does not tell us. Embedded in the parties’ leases, therefore,
was an ambiguous statutory term about what expenses could be
deducted. On the ambiguity point I agree with the Arkansas Court of
Appeals’ decision and disagree with this Court’s earlier decisions.
If there was any doubt that Ark. Code. Ann. § 15-72-305’s meaning was
murky, the fact that diligent and careful judges have come to
reasonable and opposite conclusions about that meaning removes it.
Fourth, what do these ambiguous phrases in the unamended
statute—“net proceeds” and “all lawful deductions”—mean?
The Court must make an Erie-educated prediction about what the
Arkansas Supreme Court would hold. Blankenship v. USA Truck, Inc.,
601 F.3d 852, 856 (8th Cir. 2010). And this Court must answer, albeit on
a partial record and in a bit of a hurry, because Flywheel’s
constitutional challenges depend on what the governing Arkansas law
is before Act 1024 goes into effect.
Start with the statute’s words. Net proceeds are not gross
proceeds. And lawful deductions are not limited to taxes.
The structure of the whole, as Brother Rudofsky concluded, likewise
favors Flywheel’s interpretation that post-production expenses can be
deducted. Doc. 45 at 9–20 in Hurd, Case No. 4:21-cv-1207-LPR
(E.D. Ark. 26 May 2023).
The views of the agency charged with administering this complex
statutory scheme are entitled to consideration and respect, though not
blind deference. Myers v. Yamato Kogyo Co., Ltd., 2020 Ark. 136,
at 5–6, 597 S.W.3d 613, 617; compare Loper Bright Enterprises v. Raimondo,
603 U.S. 369, 392 (2024). The AOGC concluded that post-production
costs were not properly deducted from the statutory royalty.
Flywheel, 2023 Ark. App. at 7, 678 S.W.3d at 856.
Consider, too, the course of performance across the Fayetteville
Shale, which can liquidate an ambiguous statutory/contractual term.
E.g., RAD-Razorback Limited Partnership v. B.G. Coney Co., 289 Ark. 550,
555, 713 S.W.2d 462, 466 (1986). Deducting transportation expenses,
even though those expenses are not mentioned, seems to have always
been fine. The preliminary record available indicates that, in most
instances, other post-production expenses were not deducted from the
one-eighth royalty during the Shale’s first decade or so. Flywheel, 2023
Ark. App. at 3, 678 S.W.3d at 854. That changed when Flywheel
succeeded Southwestern on the scene. Van Buren’s predecessor,
however, deducted those expenses. And this Court ruled for that
predecessor, Exxon/XTO, rejecting mineral owners’ challenge to those
deductions. Doc. 109 in Whisenhunt Investments, LLC v. Exxon Mobil
Corp., Case No. 4:13-cv-656-JM (E.D. Ark. 28 July 2016). That case
started and ended before Flywheel bought into the Shale play. I also
recall a settled case about deductions for these post-production
expenses early in the play. It involved all the big companies. Collins v.
Seeco, Inc., Case No. 4:11-cv-761-DPM (E.D. Ark. 19 October 2011).
There must be more to this story. At this point, though, all the Court
can say is that the course of performance is mixed, but leans against
Flywheel.
The Arkansas precedent in the neighborhood does not answer the
question directly. It can be read either as the Arkansas Court of
Appeals described or as this Court has described in Hurd and like cases.
I come back to the statute’s words and the General Assembly’s
purposes in the 1985 amendments. The point was to resolve “certain
inequities” in how royalties were distributed. Act of 6 March 1985,
No. 272, 1985 Ark. Acts 441, 441–42 (Whereas Clause). Net is after
expenses. Some deductions beyond taxes are lawful. Cotton must be
ginned, ore refined, and gas treated. The raw material must be put in
salable form. The hearing testimony indicated that the quality of
extracted natural gas varies. Over time, the quality also declines,
requiring additional treatment. Some geologic truth seems to have
brought the statute’s latent ambiguity forward. As a witness testified,
the Fayetteville Shale is in shallow decline, on the far right of the
productivity bell curve. Section 15-72-305 aims to provide a uniform
initial royalty to all mineral owners in an integrated unit. The General
Assembly could have easily specified that individual leases, or the
AOGC’s form lease, controlled the expenses deductible from the
statutory royalty. It did not. Instead, everyone shares in the net first
fruits, whether they agreed to lease their mineral rights or not, and, if
they did lease those rights, no matter the specific lease terms. The
statute provides a rough justice solution to promote development of a
valuable commodity subject to shared ownership. This Court’s
preliminary Erie prediction is that the Arkansas Supreme Court would
construe the current version of Ark. Code. Ann. § 15-72-305 to allow for
deduction of post-production expenses in calculating the one-eighth
statutory royalty for all mineral owners in integrated units.
Sixth, Act 1024 of 2025 speaks clearly, removing the ambiguity in
Arkansas law. Deductions for post-production expenses are
determined by the lease, either the AOGC’s form (if the mineral owner
has not executed a lease) or the mineral owner/working interest
owner’s lease. Act of 22 April 2025, No. 1024, § 2. The clarity is
commendable. There is no dispute that the General Assembly could
provide that needed clarity for future leases affecting mineral rights.
Hurd v. Arkansas Oil & Gas Commission, 2020 Ark. 210, at 9–11,
601 S.W.3d 100, 105–06. But this amendment to Ark. Code Ann.
§ 15-72-305 changes the deal prescribed by this admittedly murky
statute embedded in Flywheel’s legal relationships.
The Contract Clause’s words bar states from passing any law that
impairs the obligations of contracts. U.S. CONST. art. I, § 10, cl. 1.
This absolute bar has been lowered. Ashley Sveen v. Kaye Melin, 584 U.S.
811, 818–19 (2018); Association of Equipment Manufacturers v. Burgum,
932 F.3d 727, 731–33 (8th Cir. 2019). The States’ police powers are now
understood to provide more maneuvering room for public-protecting
legislation that affects existing contractual relationships. The first
question is whether a law substantially impairs existing contractual
relationships. Sveen, 584 U.S. at 819; Burgum, 932 F.3d at 730–31.
The second is whether the state has shown “a significant and legitimate
public purpose underlying the Act.” Burgum, 932 F.3d at 730
(quotation omitted); see also Sveen, 584 U.S. at 819.
Flywheel is likely to prevail on its Contract Clause claim.
Act 1024 substantially impairs Flywheel’s contractual rights. It changes
the bargain, making post-production expenses non-deductible even
though those expenses reduce the overall net proceeds from the wells.
These expenses are not insignificant. A witness testified that they’re
approximately $2.67 million dollars each month for all Flywheel,
Razorback, and Van Buren wells. These expenses are approximately
$530,000 for the wells with gross leases. Could these lessees and CAER
have seen this change in the law coming when they took over the
leases? Burgum, 932 F.3d at 730. That’s a close question because of the
statute’s ambiguity, the varying practices of predecessor operators in
the Shale, and the litigation on this issue. At best, it’s a maybe.
Could Flywheel have done anything to safeguard its rights or can it do
anything to reinstate them? No. Unlike in Blaisdell, this is not a
moratorium with a clear end date. And Flywheel can’t get any interim
relief like the court-set monthly rental payments during that
moratorium. 290 U.S. at 416–17. Plus, unlike in Sveen, no possibility
exists for reinstating payment of post-production expenses by simply
filling out a form or having a court make a preemptive finding. 584 U.S.
at 819–22. Act 1024 shifts significant dollars from one side of these
contractual relationships to another side for as long as a well produces
gas. Flywheel is likely to prevail in showing that the amendment to
§ 15-72-305 substantially impairs its contractual rights.
That conclusion raises the next question, “the means and end of
the legislation.” Sveen, 584 U.S. at 819. Again, one end is salutary:
clarity in applicable law. But, the particular ends are less so. The Act
does not clarify the law to benefit a wide swath of the public.
Compare Energy Reserves Group, Inc. v. Kansas Power & Light Co.,
459 U.S. 400 (1983), which involved all Kansas consumers of natural
gas. While the payment of royalties in the Shale has been a vexed
question, these disagreements do not present a crisis like how to handle
defaulted mortgages during the Great Depression or respond to the
economic effects of the COVID pandemic. Blaisdell, 290 U.S. at 416;
Heights Apartments, LLC v. Walz, 30 F.4th 720, 723–24 (8th Cir. 2022).
Instead, the understandable purpose of Act 1024 is to favor mineral
owners, mostly Arkansawyers, over the few operators and working
interest owners. These circumstances echo Burgum, where North
Dakota changed the law to favor local farm equipment dealers over the
equipment manufacturers. 932 F.3d at 729–30.
Turning from ends to means, Act 1024 shifts costs by disrupting a
specific handful of contractual expectations. A witness testified that
Flywheel, following the 2023 Arkansas Court of Appeals’ decision,
stopped deducting post-production costs for mineral owners with
AOGC form leases. Act 1024 amends Ark. Code Ann. § 15-72-305
to confirm and extend that decision. Flywheel—wearing its operator
hat—must stop deducting post-production expenses from the statutory
royalty for all mineral owners in integrated units. Though the dollars
are many, the affected Arkansawyers are not numerous. The Act
would redistribute part of the statutory royalty from the handful of
operators to the few thousand mineral interest owners. And there’s no
larger public need to do so. Compare Blaisdell, 290 U.S. at 416; Heights
Apartments, 30 F.4th at 723–24. In both its ends and its means, Act 1024
is akin to the special interest legislation invalidated in Burgum, so it
likely violates the Contract Clause. 932 F.3d at 732.
*
Because the plaintiffs are likely to succeed on their Contract
Clause claims, the Court need not consider their Takings Clause and
Due Process Clause claims. Brandt ex rel. Brandt v. Rutledge, 47 F.4th
661, 669 (8th Cir. 2022). The relief they seek is the same—an injunction
against Act 1024’s implementation and enforcement. The Court
therefore proceeds to the other Dataphase factors: irreparable harm,
the equitable balance, and the public interest. Dataphase, 640 F.2d
at 114. The latter two merge when, as here, “the Government is the
party opposing the preliminary injunction.” Morehouse Enterprises, LLC
v. Bureau of Alcohol, Tobacco, Firearms & Explosives, 78 F.4th 1011, 1018
(8th Cir. 2023).
“Economic loss, on its own, is not an irreparable injury so long as
the losses can be recovered.” Wildhawk Investments, LLC v. Brava I.P.,
LLC, 27 F.4th 587, 597 (8th Cir. 2022). Sometimes full recovery may be
legally barred, for example, when sovereign immunity applies.
Other times it may be practically barred, such as when a loss is either
unquantifiable or intangible. Ibid. This case presents a mix of both.
Consider the practical challenges. Natural gas is a finite resource.
And the wells in the Fayetteville Shale are in shallow decline. Year over
year, it has become harder and less profitable to extract the natural gas
as is. Removing deductions for post-production expenses from the
equation will likely shorten the wells’ projected economic lives, forcing
Flywheel to shut in many wells prematurely. Plugged wells cannot be
unplugged, except at great expense, and the gas gets left in the ground.
Everyone loses in that situation. Flywheel’s profits get cut,
and the mineral owners’ royalties get cut off. If Flywheel prevails in its
challenge to Act 1024, as the Court predicts it will, what would be its
recourse? Could it sue the State for damages? No. Kruger v. Nebraska,
820 F.3d 295, 301 (8th Cir. 2016). Could it sue the mineral owners for
the unextracted gas it had to abandon? Also no. The oil and gas
leases end after drilling operations stop. Plaintiffs’ Exhibits 2–5.
The irreparable harm that Flywheel faces is not simply the possibility
of overpaying royalties, which could be recovered if production
continued; it’s the loss of the finite, profit-generating resources that will
likely follow. Because Flywheel “would be unable to fully recover such
losses merely through [its] participation in the market,” the Court finds
that it is likely to suffer irreparable harm. Iowa Utilities Board v. F.C.C.,
109 F.3d 418, 426 (8th Cir. 1996).
That leaves the final two Dataphase factors—the equitable balance
and the public interest—which merge here. Morehouse Enterprises,
78 F.4th at 1018. Like Flywheel, the State also faces irreparable harm.
“[A]ny time a State is enjoined by a court from effectuating statutes
enacted by representatives of its people, it suffers a form of irreparable
injury.” Maryland v. King, 567 U.S. 1301, 1303 (2012) (Roberts, C.J.,
in chambers) (quotations omitted). This injury, though, is accounted
for by Rounds’s heightened merits standard. Rodgers v. Bryant, 942 F.3d
451, 459 (8th Cir. 2019). The only question now is which way the
equitable scales tip.
All material things considered, the Court finds that the equities
favor Flywheel. It is “always in the public interest to prevent the
violation of a party’s constitutional rights.” Brandt, 47 F.4th at 672
(quotations omitted). And Act 1024 likely violates Flywheel’s rights
under the Contract Clause. A temporary pause on Act 1024’s retroactive
application, limited to the plaintiffs, leaves much of this legislation
undisturbed. All parties agree that there are no Contract Clause
concerns with applying the Act prospectively.∗∗∗ In the meantime,
maintaining the status quo, coupled with adequate security, will do the
least amount of harm to both sides.
*
The Court preliminarily enjoins Alan York (acting in his official
capacity as the Director of the Arkansas Oil and Gas Commission)
from enforcing Act 1024 against Flywheel Energy Production, LLC,
Van Buren Energy Production, LLC, Razorback Production, LLC, and
CAER Energy, LLC on any mineral lease signed before 5 August 2025.
This preliminary injunction issues on the condition that Flywheel
escrow, in an interest-bearing account, an amount equal to the
deducted post-production expenses on the statutory royalty that it
would have paid the mineral interest owners had the statute gone into
effect. Fed. R. Civ. P. 65(c); Stockslager v. Carroll Electric Coop. Corp.,
528 F.2d 949, 951 (8th Cir. 1976). Flywheel must also file a detailed
accounting about these escrowed funds, starting on 30 September 2025
and each quarter thereafter. The Court invites the parties’ suggested
refinements to the securities/escrow obligation. By 18 August 2025,
∗∗∗ Although Flywheel’s facial challenges under the Takings and Due Process
Clauses have a prospective dimension, it conceded at the hearing that those
claims are not its focus. In any event, the Court is not persuaded that
Flywheel is likely to prevail on them. Facial challenges are notoriously
“hard to win.” Moody v. NetChoice, LLC, 603 U.S. 707, 723 (2024).
the parties must meet, confer, and propose any changes they believe
are needed.
The Court also encourages an appeal so this case can be
consolidated and decided with the pending Hurd-progeny cases.
If none of the related state court litigation, e.g., the
proposed-intervenors case, is decided by the Arkansas Supreme Court
before the Eighth Circuit makes its decision, then at least the Court of
Appeals can issue a comprehensive opinion about what Arkansas law
requires against the day when the Arkansas Supreme Court provides a
definitive construction of the statute.
So Ordered.
_________________________
D.P. Marshall Jr.
United States District Judge
___________________