Goliath beaten with gavel

On Oct. 27, 2008, four years after Discover Financial Services filed antitrust lawsuits against Visa Inc. and MasterCard Worldwide, settlement agreements were finally reached. Discover sued both card giants for nearly $6 billion, alleging that both companies harmed Discover's business by forcing banks to choose between issuing MasterCard and Visa cards or Discover-branded cards.

Discover filed its damages suit in October 2004 in New York, following the conclusion of the U.S. Department of Justice's ruling earlier in the year that determined Visa and MasterCard had violated antitrust and anti-competition laws. Under terms of the settlement, Discover is expected to receive up to $2.75 billion; $1.89 billion from Visa and $862.5 million from MasterCard.

"This settlement will enable Discover to further strengthen its capital base in this challenging economy and also will support continued investment in growing our business, including broadening global acceptance, expanding network volume and growing our deposit franchise," said David Nelms, Chief Executive Officer of Discover.

The lion's share

Visa signed an agreement with MasterCard in July 2008 to pay its portion of the settlement based on relevant business volumes: Based on industry reports for fiscal 2007, Visa controls approximately 51 percent of the credit and debit card market in the United States; MasterCard controls roughly 28 percent of the market.

"We believe Discover's lack of success resulted from decisions that created a business model unattractive to bank issuers," said MasterCard General Counsel Noah J. Hanft. "Nonetheless, we chose to settle this lawsuit to avoid the uncertainty and distraction of a lengthy jury trial. This result, which is in no way an admission of liability, is in the best interests of our shareholders, our customers and our company."

In 2007, when Discover spun off from Morgan Stanley, the two entities signed an agreement governing the manner in which the antitrust case was to be pursued and how the proceeds of the litigation were to be shared. But Discover has accused Morgan Stanley of breaching that contract.

The beat goes on

Discover had agreed to pay Morgan Stanley the first $700 million it received and half of any proceeds above $1.5 billion. However, a Discover company spokesman said that "because of the agreement breach, the amount of Morgan Stanley's special dividend is a matter of dispute."

Morgan Stanley filed suit against Discover in the New York State Supreme Court after the settlement with Visa and MasterCard was announced, "seeking a declaratory judgment to resolve this issue definitively," a Morgan Stanley representative said. Visa and MasterCard officials have said the companies have now put the suit behind them. But for Discover, it seems, the litigation beat goes on.

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