Eighth Circuit: Arkansas Act 1024 Injunction Overturned, Royalty Rules Reinstated

• The Eighth Circuit Court of Appeals has overturned an injunction blocking Arkansas Act 1024, which restricts natural gas producers from deducting post-production costs from royalty payments, thereby reinstating the act.
• Act 1024, which took effect on August 5, 2025, aims to clarify that gathering, compression, and transportation fees cannot be subtracted from mineral rights owner payments in Arkansas.
• Energy companies, including Flywheel Energy Production LLC, sued to block the act, arguing it violates constitutional contracts clauses by altering existing oil and gas lease agreements.
• A recent Eighth Circuit ruling in *Pennington v. BHP Billiton Petroleum* established that royalty deductions are only permissible if explicitly stated in the lease, treating Act 1024 as a clarification of state law.
• Despite acknowledging potential severe economic injury to producers, the court indicated its hands are tied by the *Pennington* precedent, leading to the overturning of the preliminary injunction.

The Eighth Circuit Court of Appeals has overturned a lower court's order that had prevented increased payments to owners of mineral rights in Arkansas, thereby reinstating Act 1024.

The Eighth Circuit Court of Appeals has overturned a lower court's order that had prevented increased payments to owners of mineral rights in Arkansas, thereby reinstating Act 1024. This development suggests a significant shift in the legal landscape surrounding natural gas royalty deductions, potentially paving the way for Act 1024, an Arkansas statute that took effect on August 5, 2025, to be fully enforced.

At the core of the appellate panel's deliberation was whether to lift a preliminary injunction that has temporarily halted the implementation of Act 1024. This statute aims to prohibit natural gas producers from subtracting specific post-production costs, such as gathering, compression, and transportation fees, when calculating royalty checks issued to landowners. The court's recent posture implies that energy companies operating in the state may soon face new obligations regarding how they compensate mineral rights holders.

For many decades prior to the enactment of Act 1024, the term "net proceeds" lacked explicit definition within Arkansas state statutes. This ambiguity allowed energy companies to routinely deduct various post-production costs from royalty calculations across a multitude of leases. However, the new legislation directly challenges this long-standing practice, seeking to ensure that royalty payments are made before such deductions.

In response to Act 1024, Flywheel Energy Production LLC, alongside other prominent energy firms, initiated legal action in June 2025. Their lawsuit, filed against Alan York, the Director of the Arkansas Oil and Gas Commission, asserts that the act infringes upon the contracts clause of both the U.S. and Arkansas constitutions. The companies argue that Act 1024 retroactively alters existing oil and gas lease agreements, thereby creating unconstitutional changes to their contractual obligations. A lower court had previously sided with the energy companies, granting a preliminary injunction last year that temporarily blocked the enforcement of the act.

A pivotal development influencing the Eighth Circuit's current stance is its own ruling in a separate case from August, *Pennington v. BHP Billiton Petroleum*. This case, which also involved private landowners, established that deductions from royalties are impermissible unless they are explicitly detailed within the lease agreement itself. The *Pennington* decision is crucial because it interpreted Act 1024 not as a change to existing state royalty law, but rather as a clarification of what the law always intended.

This interpretation directly undermines the energy companies' central argument that Act 1024 violates the contracts clause by altering agreements. By framing the act as a clarification, the *Pennington* ruling significantly weakens the legal basis for the preliminary injunction. Senior U.S. Circuit Judge Duane Benton, a George W. Bush appointee, articulated that the *Pennington* ruling affirmed the royalty as an inherent part of the underlying contract from its inception, further solidifying the court's position.

Despite the clear legal direction, attorney James Rankin, representing the energy companies, implored the appellate panel to maintain the preliminary injunction. He warned of severe financial repercussions for operators if the injunction is lifted, predicting a "lose-lose scenario" for Arkansas's energy market. Rankin highlighted potential outcomes such as wells being plugged prematurely, royalty owners experiencing reduced payments, natural gas becoming unrecoverable, and leases being forfeited. He further contended that the act would impose permanent, uncompensated losses on operators beyond what was initially agreed upon in their leases.

Rankin also argued that states lack the authority to retroactively alter contracts to generate substantial financial benefits for a select group of royalty holders, only to subsequently assert that such changes merely clarified existing law. U.S. Circuit Judge James Loken, acknowledging his familiarity with such disputes, underscored the significant economic injury and loss involved, suggesting that the financial ramifications were being oversimplified. Nevertheless, the judicial panel ultimately conveyed that, despite these acknowledged economic concerns, their discretion is likely constrained by the court's prior ruling in *Pennington*, indicating a probable path toward lifting the injunction.

Energy lawyers and compliance officers in Arkansas should prepare clients for the likely lifting of the preliminary injunction against Act 1024, meaning natural gas producers will probably be unable to deduct post-production costs from royalty payments. This necessitates reviewing existing royalty agreements and advising on compliance to avoid potential liabilities and financial adjustments.

Source: Original reporting via Courthouse News Service