Visa and MasterCard pay $2.75bn to settle Discover suit

Source: Discover Financial Services

After agreeing to settle their lawsuit earlier this month, Discover Financial Services said today that it has reached an agreement with Visa and MasterCard in the settlement seeking damages for practices that suppressed third-party issuing on the Discover Network and the acceptance of its cards.

Under the terms of the settlement agreement, Discover is expected to receive up to $2.75 billion in the settlement of its lawsuit against Visa and MasterCard. Discover will receive approximately $862 million of the settlement in the current fiscal quarter and up to approximately $472 million per quarter in 2009. Payments will be reported as revenue in each quarter as earned and will be reflected in earnings per share on an after-tax basis. The quarterly payments are contingent upon Discover achieving certain performance levels in network sales volume, which the company believes it will achieve based upon past performance. The settlement agreement is subject to the approval of Visa's Class B shareholders.

"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.

Discover filed its damages suit in October 2004 following the conclusion of the Department of Justice lawsuit, which determined that the rules of Visa and MasterCard barring banks from issuing cards on the Discover Network violated antitrust laws.

Since 2004, Discover more than doubled its network volume; signed numerous third-party credit and debit issuers; became a leading PIN/POS debit network through the acquisition of PULSE; signed merchant acceptance deals with acquirers representing 98 percent of U.S. merchant card volume; and increased international acceptance through strategic alliances and the acquisition of Diners Club International.

At the time of the 2007 spin-off of Discover by Morgan Stanley, both parties entered into an agreement governing 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. Discover has notified Morgan Stanley that Morgan Stanley is in breach of the agreement and the amount of Morgan Stanley's special dividend is a matter of dispute.

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