For the past several years, there has been much uncertainty as to when an arbitration provision can be enforced pursuant to Nevada law. Adopted in 2013, NRS 597.995 provides that an enforceable arbitration provision must include “specific authorization” indicating that the person has affirmatively agreed to arbitrate all disputes concerning the agreement. Subsequent to the enactment of NRS 597.995, numerous court decisions opined on what could satisfy this specific authorization requirement in order to make an arbitration provision effective. For example, in Fat Hat, LLC v. Diterlizzi, 385 P.3d 580 (Nev. 2016), the Nevada Supreme Court held that an arbitration provision in an employment agreement was not specifically authorized simply because an employee signed the last page of an agreement and initialed the bottom of every page. While the Court did not provide a bright line test for specific authorization, the decision stated that an arbitration provision would be enforceable if an employee filled out his/her name and address next to the arbitration provision along with language “explicitly stating that the agreement to arbitrate was effective.“
Following the decision in Fat Hat, many practitioners included name and address lines next to arbitration provisions in reliance on the Court’s specific example of an enforceable provision. It was unclear how much one could deviate from that particular model without taking the risk that an arbitration provision would later be ruled ineffective pursuant to NRS 597.995.
However, on September 5, 2019, the Supreme Court did an about-face, sharply undercutting NRS 597.995 by ruling that it is preempted by the Federal Arbitration Act, thus eliminating the “specific authorization“ requirement altogether. See MMAWC, LLC v. Zion Wood Obi Wan Tr., 135 Nev. Adv. Op. 38, 448 P.3d 568 (2019).
The rational for the application of the FAA was more thoroughly explained in the prior Nevada Supreme Court opinion for U.S. Home Corp. v. Michael Ballesteros Tr., 134 Nev. 180, 189, 415 P.3d 32, 40 (2018). In that decision, the Court noted that the FAA governs all transactions concerning interstate commerce, and will therefore apply to essentially any contract entered into under Nevada law. Under the FAA, a state may regulate contracts, including arbitration clauses, under general contract law principles, which include fraud, duress, and unconscionability. What a state may not do is decide that a contract is fair enough to enforce all of its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause. Under the FAA, a state must place arbitration provisions on the same footing as other contractual provisions rather than singling out arbitration provisions for suspect status.
In MMAWC, the Court explicitly applied this preemption to the “specific authorization“ requirement, holding that Nevada state law could not subject an arbitration provision to this additional requirement. Going forward, this decision should make it much easier to enforce an arbitration provision in Nevada. However, it is still best practice to draft arbitration provisions which meets the higher standard set forth in Fat Hat to guard against the risk that a future decision may seek to limit the reach of FAA preemption.
If you are a Nevada employer who has questions regarding NRS 597 and drafting an enforceable arbitration provision, feel free to contact Jordan Wolff at Saltzman Mugan Dushoff to discuss. This blog post does not constitute legal advice, and reading or interacting with this website does not create an attorney-client relationship.
