Feb. 14, 2024 – A circuit court erred by ruling that whether a party had waived its right to arbitration by its litigation conduct was a decision for the arbitrator rather than the court, the Wisconsin Court of Appeals has ruled.

In U.S. Bank National Association v. Klein, 2022AP920 (Jan. 25, 2024), the Court of Appeals (District IV) distinguished a Wisconsin Supreme Court holding that the issue of whether a party had waived its right to arbitration was properly decided by an arbitrator.

Boat Sale Gone Bad

Christopher Klein bought a 22-foot runabout boat and trailer in 2008 from American Marine, Inc. (American Marine).

Klein signed a retail installment contract and security agreement; the contract required him to make 180 monthly payments. The contract also contained an arbitration clause.

Under that clause, any claim arising from the credit services provided to Klein or the validity of the clause “must, after an election by you or us, be resolved by binding arbitration.”

After the purchase, American Marine assigned the contract to U.S. Bank National Association (U.S. Bank).

Repo Man

Klein stopped making monthly payments and he surrendered the boat to U.S. Bank National Association (U.S. Bank). U.S. Bank seized the trailer.

U.S. Bank claimed that after the sale of the boat and the trailer, Klein still owed $10,277.50.

Lawsuit Follows

In April 2021, U.S. Bank sued Klein in Jefferson County Circuit Court to recover that amount.

In April 2022, U.S. Bank filed a motion to compel arbitration.

Klein argued that U.S. Bank had waived its right to arbitration by litigating the case for one year.

The circuit court relied on First Weber Group, Inc. v. Synergy Real Estate Group, LLC, 2015 WI 34, 361 Wis. 2d 496, 860 N.W.2d 498, to hold that an arbitrator should decide whether U.S. Bank had waived its right to arbitration.

The circuit court granted U.S. Bank’s motion to compel arbitration and dismissed the case without prejudice.

Klein appealed.

Arbitrator or Judge?

Writing for a three-judge panel, Judge Jennifer Nashold began her opinion by noting that under the Wisconsin Arbitration Act, Wis. Stat. chapter 788, a court must stay a trial of any action on an issue which, under a written agreement, is subject to arbitration.

But Nashold explained that under Wisconsin Supreme Court caselaw, a party may waive its right to arbitration by engaging in conduct that: 1) shows that the party didn’t regard an arbitration clause as having any effect; or 2) may be reasonably construed as showing that the party did not intend to take advantage of the arbitration clause.

U.S. Bank argued that an arbitrator should decide whether it had waived its right to arbitration. Klein argued that a court should decide the issue.

Wisconsin Case Law

Judge Nashold pointed out that in First Weber Group, the Supreme Court held that waiver was an issue of procedural arbitrability properly decided by an arbitrator, as opposed to an issue of substantive arbitrability properly decided by a court.

However, Nashold reasoned that the Supreme Court’s discussion of waiver as an issue of procedural arbitrability did not refer to waiver by litigation conduct.

Judge Nashold noted that a significant majority of federal and state courts that have addressed the issue have held that a court should decide whether a party has waived its right to arbitrability by litigation conduct.

Wording ‘In Context’

Nashold noted that in deciding that waiver was an issue of procedural arbitrability, First Weber Group quoted wording from two U.S. Supreme Court decisions – wording emphasizing that, as a matter of law, any question about the scope of an arbitrable issue should be decided in favor of arbitration.

“Understood in context, the language from these cases does not refer to the specific issue of whether a party has waived its contractual right to enforce an arbitration agreement based on its litigation conduct,” Judge Nashold wrote.

Nashold pointed out that multiple federal courts have held that the relevant wording from the two U.S. Supreme Court decisions relied upon by First Weber Group did not apply to the issue of whether a party had waived its right to arbitration by litigation conduct.

She also noted that waivier by litigation conduct was not an issue in ​ First Weber Group.

Court Should Decide

Judge Nashold concluded that a court and not an arbitrator should decide whether a party had waived its right to arbitration by litigation conduct, for the following reasons:

• A court is better qualified to answer to the issue because the court has been involved in each step of the litigation;

• Answering whether a party has waived its right to arbitration by litigation conduct strongly implicates judicial procedures;

• Sending waiver-by-litigation-conduct claims to an arbitrator would be inefficient, because the arbitrator’s decision would often end up back in front of the court; and

• Wis. Stat. section 788.02 requires a court to refer a matter to arbitration under an arbitration clause, as long as the party seeking arbitration “is not in default in proceeding with such arbitration.”

“Thus, when a party has waived the right to arbitrate by pursuing litigation, section 788.02 recognizes an exception to the requirement that a circuit court refer the matter to arbitration,” Nashold wrote.

As a result, Judge Nashold concluded that it was for a court to decide the waivier-by-litigation-conduct issue, unless the arbitration clause clearly provides otherwise.

The Court of Appeals remanded the case to the circuit court to answer whether U.S. Bank had waived its right to arbitration through its litigation conduct.