Discover 2009 Annual Report Download - page 147

The Company filed a lawsuit captioned Discover Financial Services, Inc. v. Visa USA Inc., MasterCard Inc. et al. in the
U.S. District Court for the Southern District of New York on October 4, 2004. Through this lawsuit the Company sought to
recover substantial damages and other appropriate relief in connection with Visa’s and MasterCard’s illegal
anticompetitive practices that, among other things, foreclosed the Company from the credit and debit network services
markets. The lawsuit followed the U.S. Supreme Court’s October 2004 denial of Visa’s and MasterCard’s petition for
review of the decision of the U.S. Court of Appeals affirming a lower court decision in a case brought by the U.S.
Department of Justice in which the court found that Visa’s and MasterCard’s exclusionary rules violated the antitrust laws
and harmed competition and consumers by foreclosing the Company from offering credit and debit network services to
banks.
The Company executed an agreement to settle the lawsuit with MasterCard and Visa on October 27, 2008. The
agreement became effective on November 4, 2008 upon receipt of the approval of Visa’s Class B shareholders. Under
the settlement, Visa and MasterCard agreed to pay the Company up to $2.75 billion in exchange for the Company’s
agreement to dismiss the lawsuit and release all claims. MasterCard paid the Company $862.5 million in the fourth
quarter of 2008. The Company met all financial performance measures to which it was subject under the settlement
agreement and, as a result, the Company received the maximum amount of $1.9 billion, plus interest, in four quarterly
payments from Visa in fiscal 2009.
At the time of the Company’s 2007 spin-off from Morgan Stanley, the Company entered into an agreement with
Morgan Stanley regarding the manner in which the antitrust case against Visa and MasterCard was to be pursued and
settled and how proceeds of the litigation were to be shared (the “Special Dividend Agreement”). As previously disclosed,
the agreement provided that, upon resolution of the litigation, after expenses, the Company would be required to pay
Morgan Stanley the first $700 million of value of cash or non-cash proceeds (increased at the rate of 6% per annum until
paid in full), plus 50% of any proceeds in excess of $1.5 billion, subject to certain limitations and a maximum potential
payment to Morgan Stanley of $1.5 billion. All payments by the Company to Morgan Stanley would be net of taxes
payable by the Company with respect to such proceeds. In addition, the agreement provides that any amounts payable to
Morgan Stanley that are not paid within thirty days following the end of a fiscal quarter in which proceeds are received
by us will accrue interest from the thirtieth day until paid at a rate of 6% per annum.
On October 21, 2008, Morgan Stanley filed a lawsuit against the Company in New York Supreme Court for New
York County seeking a declaration that Morgan Stanley did not breach the Special Dividend Agreement, did not interfere
with any of the Company’s existing or prospective agreements for resolution of the antitrust case against Visa and
MasterCard, and that Morgan Stanley is entitled to receive a portion of the settlement proceeds as set forth in the Special
Dividend Agreement. On November 18, 2008, the Company filed its response to Morgan Stanley’s lawsuit, which
includes counterclaims against Morgan Stanley for interference with the Company’s efforts to resolve the antitrust lawsuit
against Visa and MasterCard and willful and material breach of the Special Dividend Agreement, which expressly
provided that the Company would have sole control over the investigation, prosecution and resolution of the antitrust
lawsuit. Through the Company’s counterclaims, the Company seeks a ruling that because of Morgan Stanley’s willful,
material breach of the Special Dividend Agreement, it has no right to its share of the proceeds from the settlement. The
Company has also requested damages in an amount to be proven at trial. Morgan Stanley moved for partial summary
judgment seeking payment of its share of the proceeds, and on January 4, 2010, the court issued an order granting the
motion. The Company intends to appeal the order and to continue to pursue its separate claims for damages. The parties
substantially completed the fact discovery phase of the case in December 2009. Expert reports are due in January and
February 2010, and dispositive motions are to be filed in March 2010. See Note 28: Subsequent Events for additional
information.
24. Fair Value Disclosures
The Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value.
To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not
readily available and fair value is determined using present value or other techniques appropriate for a particular
financial instrument. These techniques involve some degree of judgment and, as a result, are not necessarily indicative of
the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation
techniques may have a material effect on the estimated fair value amounts.
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