Discover 2011 Annual Report Download - page 153

141
The Company’s estimated range above involves significant judgment, given the varying stages of the proceedings, the
existence of numerous yet to be resolved issues, the breadth of the claims (often spanning multiple years and, in some cases, a
wide range of business activities), unspecified damages and/or the novelty of the legal issues presented. The outcome of
pending matters could be material to the Company’s consolidated financial condition, operating results and cash flows for a
particular future period, depending on, among other things, the level of the Company’s income for such period, and could
adversely affect the Company’s reputation.
The Company has historically relied on the arbitration clause in its cardmember agreements, which has in some
instances limited the costs of, and the Company’s exposure to, litigation, but there can be no assurance that the Company will
continue to be successful in enforcing its arbitration clause in the future. Legal challenges to the enforceability of these clauses
have led most card issuers and may cause the Company to discontinue their use. In addition, there are bills pending in Congress
to directly or indirectly prohibit the use of pre-dispute arbitration clauses and the Reform Act authorized the CFPB to limit or
ban pre-dispute arbitration clauses. Further, the Company is involved in pending legal actions challenging its arbitration clause.
The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and
informal) by governmental agencies regarding the Company’s business including, among other matters, accounting, tax and
operational matters, some of which may result in significant adverse judgments, settlements, fines, penalties, injunctions,
decreases in regulatory ratings or other relief, which could materially impact the Company's financial statements, increase its
cost of operations, or limit its ability to execute its business strategies and engage in certain business activities. For example,
the Company received a notice of proposed assessment from the IRS related to its audit of the Company’s 1999-2005 tax years
as further discussed in Note 17: Income Taxes.
In addition, as previously disclosed, the FDIC has been reviewing Discover Bank's marketing practices with respect to
its fee-based products, including its payment protection fee product. The FDIC and the CFPB have notified Discover Bank that
they plan to take a joint enforcement action against Discover Bank. Before the FDIC's and the CFPB's review began, Discover
Bank made changes to both its fee-based products and program, and Discover Bank believes its current business practices
substantially address the regulators' concerns. The enforcement action could include civil monetary penalties, significant
restitution and additional business practice changes.
There are eight class action cases pending in relation to the sale of the Company’s payment protection fee product. The
cases were filed (all in United States District Courts) on: July 8, 2010 in the Northern District of California (Walker, et al. v.
DFS, Inc. and Discover Bank; subsequently transferred to the Northern District of Illinois); July 16, 2010 in the Central District
of California (Conroy v. Discover Financial Services and Discover Bank); October 22, 2010 in the District of South Carolina
(Alexander v. Discover Financial Services, Inc.; DFS Services LLC; Discover Bank; and Morgan Stanley); November 5, 2010
in the Northern District of Illinois (Callahan v. Discover Financial Services, Inc. and Discover Bank); December 17, 2010 in
the Western District of Tennessee (Sack v. DFS Services LLC; Discover Financial Services, Inc.; and Discover Bank);
January 14, 2011 in the Eastern District of Pennsylvania (Boyce v. DFS Services LLC; Discover Financial Services Inc.;
Discover Bank); February 15, 2011 in the Southern District of Florida (Triplett v. Discover Financial Services, Inc., DFS
Financial Services LLC, Discover Bank and Morgan Stanley); and March 7, 2011 in the Eastern District of Pennsylvania
(Carter v. Discover Financial Services, Inc., DFS Financial Services LLC, Discover Bank, Morgan Stanley et al.). All of the
cases have been transferred to the U.S. District Court for the Northern District of Illinois pursuant to a multi-district litigation
order issued by the Joint Panel on Multidistrict Litigation in February 2011. These class actions challenge the Company’s
marketing practices with respect to its payment protection fee product to cardmembers under various state laws and the Truth in
Lending Act. The plaintiffs seek monetary remedies including unspecified damages and restitution, attorneys’ fees and costs,
and various forms of injunctive relief including an order rescinding the payment protection fee product enrollments of all class
members. In June 2011, the Company and class counsel entered into a preliminary global settlement of all of the pending class
actions. On November 9, 2011, the court granted preliminary approval of the settlement. The settlement encompasses Discover
Bank's sale and administration of Discover Payment Protection, Identity Theft Protection, Wallet Protection and Credit Score
Tracker. The settlement remains subject to final approval by the court following completion of notice to the settlement class.
On December 6, 2010, the Attorney General for the State of Minnesota filed a lawsuit against the Company in the
District Court for Hennepin County, Minnesota (Minnesota v. Discover Financial Services, Discover Bank and DFS Services
LLC). The lawsuit challenges the Company’s enrollment of Discover cardmembers in various fee based products under
Minnesota law. The remedies sought in the lawsuit include an injunction prohibiting the Company from engaging in the alleged
violations, restitution for all persons allegedly injured by the complained of practices, civil penalties and costs. On November
2, 2011, the Company entered into a consent judgment in settlement of this lawsuit.
On August 16, 2011, the Attorney General of West Virginia filed a lawsuit against the Company in the Circuit Court of
Mason County, West Virginia (West Virginia v. Discover Financial Services, Inc., Discover Bank, DFS Services LLC et al.).
The lawsuit asserts various claims related to the Company's marketing and administration of various fee based products under
West Virginia law. The relief sought in the lawsuit includes an injunction prohibiting the company from engaging in the
alleged violations, restitution and disgorgement of monies received from the complained of practices, civil penalties and costs.
The Company will seek to vigorously defend all claims asserted against it in this matter.
Table of Contents