Public Citizen’s attack on arbitration highlights the case of Alex Karakhanov. Public Citizen’s take on the anecdote demonstrates why Public Citizen has no business calling itself a consumer advocacy group.
Karakhanov used credit cards to buy a time-share in Mexico, and then changed his mind when he returned to the US. The seller refused to give him a refund. Karakhanov asked MBNA to cancel his $3972.20 credit-card payment; MBNA investigated, found that the seller had stood on its contractual rights, and resolved the dispute in favor of the seller. Instead of paying MBNA and suing the time-share, Karakhanov simply refused to pay his credit-card debt. MBNA shrugged and reported the failed debt payments, and other vendors rejected Karakhanov for credit (though Karakhanov was still able to successfully refinance his mortgage).
Karakhanov, who brought all of this on himself, responded by suing MBNA (rather than the time-share) for $200,000 over the $4,000 debt. MBNA successfully required Karakhanov to bring his lawsuit in front of an arbitrator, who found the Karakhanov claims meritless. Public Citizen’s complaint? NAF billed $8,175 for the arbitration (though MBNA agreed to pay the arbitration expense). But NAF’s arbitration fees are based on the size of the claim. Had Karakhanov asked for actual damages rather than a windfall, the fees would have only been $470.
This is not an example of the problems of arbitration, but an example of the problems of abusive litigation and why they raise costs to consumers. Perhaps Karakhanov is worse off because he had to arbitrate his claims; if he were allowed to bring his lawsuit in court, he could have imposed tens of thousands of dollars of legal expense on MBNA, and MBNA might have been successfully extorted into settling a meritless claim. (As it was, he sued MBNA again after losing the arbitration. The arbitration decision permitted the court to dismiss the case relatively cheaply.) But what is quite clear is that other MBNA customers are substantially better off because Karakhanov was forced to arbitrate his claims. While Karakhanov, without consequence, forced MBNA to spend thousands of dollars defending itself, the mandatory binding arbitration clause prevented Karakhanov from using his unreasonably litigious behavior to impose even more costs on reasonable consumers.
The Karakhanov example demonstrates why arbitration clauses must be mandatory to save consumers money: Karakhanov would have been able to extort MBNA if the arbitration clause was voluntary by insisting on wasting time and money in court, and MBNA would not be able to lower costs to consumers because it would not be able to guarantee that abusive litigants like Karakhanov could not impose gigantic legal expenses upon it. Arbitration clauses protect honest consumers at the expense of the dishonest ones.
If Public Citizen were interested in advocating for consumers rather than for trial lawyers, they would recognize that the Karakhanov case demonstrates the benefits of mandatory binding arbitration.