Discover 2009 Annual Report Download - page 51

formal and informal) by governmental agencies regarding our business, including, among other matters, accounting, tax
and operational matters, some of which may result in adverse judgments, settlements, fines, penalties, injunctions, or
other relief. Litigation and regulatory actions could also adversely affect our reputation.
We contest liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent
difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate
damages or where investigations and proceedings are in the early stages, we cannot predict with certainty the loss or
range of loss, if any, related to such matters, how such matters will be resolved, when they will ultimately be resolved, or
what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, we believe, based on
current knowledge and after consultation with counsel, that the outcome of the pending matters will not have a material
adverse effect on our financial condition, although the outcome of such matters could be material to our operating results
and cash flows for a particular future period, depending on, among other things, our level of income for such period.
We 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 we 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 us 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 us from offering credit and debit network services to banks.
We 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 us up to $2.75 billion in exchange for our agreement to dismiss the
lawsuit and release all claims. MasterCard paid us $862.5 million in the fourth quarter of 2008. We met all financial
performance measures to which we were subject under the settlement agreement and, as a result, we received the
maximum amount of $1.9 billion, plus interest, in four quarterly payments from Visa in fiscal 2009.
At the time of our 2007 spin-off from Morgan Stanley, we 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, we 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 us to Morgan Stanley would be net of taxes payable by us 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 us 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
our 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, we filed our response to Morgan Stanley’s lawsuit, which includes counterclaims against Morgan
Stanley for interference with our efforts to resolve the antitrust lawsuit against Visa and MasterCard and willful and
material breach of the Special Dividend Agreement, which expressly provided that we would have sole control over the
investigation, prosecution and resolution of the antitrust lawsuit. Through our counterclaims we seek 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. We have 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. We intend to appeal the order and to continue to pursue our 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 to our consolidated financial statements for additional information.
-39-