Discover 2010 Annual Report Download - page 51

being utilized to a reasonable capacity and we believe our principal facilities are both suitable and adequate to meet our
current and projected needs. We also have seven leased offices, five of which are located outside the United States, that
are used to support our Diners Club operations and a leased office that supports our Direct Banking segment.
Item 3. Legal Proceedings
In the normal course of business, from time to time, we have been named as a defendant in various legal actions,
including arbitrations, class actions, and other litigation, arising in connection with our 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. We have historically relied on the arbitration clause in our cardmember agreements, which has in
some instances limited the costs of, and our exposure to, litigation, but there can be no assurance that we will continue to
be successful in enforcing our arbitration clause in the future. Legal challenges to the enforceability of these clauses have
led most card issuers and may cause us to discontinue their use, and there are bills pending in Congress to directly or
indirectly prohibit the use of pre-dispute arbitration clauses. Further, we are involved in pending legal actions challenging
our arbitration clause. We are also involved, from time to time, in other reviews, investigations and proceedings (both
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. For example, we have 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 to the consolidated financial statements. 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.
Bennett et al. v. Discover Card
On November 16, 2010, a putative class action lawsuit was filed against us by a cardmember in the U.S. District
Court for the Southern District of California (Michele Bennett et al. v. Discover Card, a/k/a DFS Services LLC). The
plaintiff alleges that we contacted her, and members of the putative class, on their cellular telephones without their
express consent in violation of the Telephone Consumer Protection Act (“TCPA”). The TCPA provides for statutory
damages of $500 for each violation ($1,500 for willful violations). Plaintiff seeks statutory damages for alleged negligent
and willful violations of the TCPA, attorneys’ fees, costs and injunctive relief. We will seek to vigorously defend all claims
asserted against us. We are not in a position at this time to assess the likely outcome or our exposure, if any, with respect
to this matter.
Payment Protection Cases
On December 6, 2010, the Attorney General for the State of Minnesota filed a lawsuit against us in the District Court
for Hennepin County, Minnesota (Minnesota v. Discover Financial Services, Discover Bank and DFS Services, LLC). The
lawsuit challenges our enrollment of Discover cardmembers in our various fee based products under Minnesota law. The
remedies sought in the lawsuit include an injunction prohibiting us from engaging in the alleged violations, restitution for
all persons allegedly injured by the complained of practices, civil penalties and costs. We will seek to vigorously defend
all claims asserted against us. We are not in a position at this time to assess the likely outcome or our exposure, if any,
with respect to this matter.
As of January 15, 2011, there were six putative class action cases pending in relation to the sale of our 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
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