Discover 2010 Annual Report Download - page 146

merchants on returned items in a timely fashion. However, where the product or service is not scheduled to be provided to
the customer until some later date following the purchase, the likelihood of a contingent payment obligation by the
Discover Network increases.
The maximum potential amount of future payments related to such contingent obligations is estimated to be the portion
of the total Discover Network transaction volume processed to date for which timely and valid disputes may be raised
under applicable law and relevant issuer and customer agreements. There is no limitation on the maximum amount the
Company may be liable to pay. However, the Company believes that such amount is not representative of the Company’s
actual potential loss exposure based on the Company’s historical experience. The actual amount of the potential exposure
cannot be quantified as the Company cannot determine whether the current or cumulative transaction volumes may
include or result in disputed transactions.
The table below summarizes certain information regarding merchant chargeback guarantees:
For the Years Ended
November 30,
2010 2009 2008
Losses related to merchant chargebacks (in thousands) .................................................................................................. $ 2,331 $ 5,836 $10,459
Aggregate transaction volume (in millions)(1) ................................................................................................................ $99,838 $93,257 $98,726
(1) Represents period transactions processed on the Discover Network to which a potential liability exists which, in aggregate, can differ from credit card sales volume.
The Company has not recorded any contingent liability in the consolidated financial statements related to merchant
chargeback guarantees at November 30, 2010 and November 30, 2009. The Company mitigates this risk by
withholding settlement from merchants or obtaining escrow deposits from certain merchant acquirers or merchants that
are considered higher risk due to various factors such as time delays in the delivery of products or services. The table
below provides information regarding the settlement withholdings and escrow deposits, which are recorded in interest-
bearing deposit accounts and accrued expenses and other liabilities on the Company’s consolidated statements of
financial condition (in thousands):
November 30,
2010 2009
Settlement withholdings and escrow deposits ................................................................................................................................ $30,483 $38,129
21. Litigation
In the normal course of business, from time to time, the Company has been named as a defendant in various legal
actions, including arbitrations, class actions, and other litigation, arising in connection with its activities. Certain of the
actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for
indeterminate amounts of damages. 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, and there are bills pending in Congress to directly or indirectly prohibit the use of 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 adverse judgments, settlements, fines, penalties, injunctions, or other relief. For example, the
Company received a notice of proposed assessment from the IRS related to its audit of our 1999-2005 tax years as
further discussed in Note 17: Income Taxes. Litigation and regulatory actions could also adversely affect the reputation of
the Company.
The Company contests 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
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