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Discover Financial Services today reached a tentative agreement to settle its long-running antitrust case with Visa Inc. and MasterCard Worldwide. Jury selection in the case had been slated to begin today for the trial. Discover filed its lawsuit seeking $6 billion in damages in 2004. Though the parties had not disclosed details of the settlement at CardLine's deadline, Discover's stock rose more than 16% this morning when the news broke. Visa and MasterCard announced at the end of the second quarter they have entered into a judgment-sharing agreement in which Visa would pay a "substantial majority" of any settlement the networks reached with Discover, based on its larger volume. Sanjay Sakhrani, an equity analyst with Keefe, Bruyette & Woods, New York, tells CardLine he believes the parties have not yet finalized an agreement, but he speculates the final settlement "could between $1.5 billion and $3 billion." Hypothetically, he says, Discover might gain net pretax proceeds in a range of about $800 million to $1.6 billion, noting that Discover had previously agreed to divide a significant portion of any settlement with its former parent, Morgan Stanley, as part of its spinoff agreement last year. "Whatever number they agree on, it must be something manageable for all parties, and the market is anxious to know that number," Sakhrani says. Discover contended in its suit that Visa's and MasterCard's exclusionary rules preventing member banks from issuing Discover cards stunted its growth over many years. Discover filed its suit after the U.S. Supreme Court let stand a lower-court ruling in an antitrust case won by the U.S. Department of Justice that forced Visa and MasterCard to allow their member banks to issue credit cards on rival networks. American Express Co. reached a $2.24 billion settlement with Visa last fall in its case based on similar issues (CardLine, 11/7/07), and MasterCard in June agreed to pay up to $1.8 billion to settle with AmEx (CardLine, 6/25). Visa said in a statement today it has reached an agreement "in principle" to settle the Discover suit but noted the parties still are negotiating specific settlement terms. MasterCard also said today it had reached an agreement in principle with Discover but added the parties "are working on settlement documentation." Discover said the agreement is "tentative" and offered no details. The announcement came shortly before jury selection began in the trial in the courtroom of Judge Barbara Jones in U.S. District Court for the Southern District of New York in Manhattan. K. Craig Wildfang, an antitrust lawyer with Minneapolis-based Robins, Kaplan, Miller & Ciresi LLP, tells CardLine that taking the settlement to the brink of jury selection is common in such cases, but it suggests the issues are very contentious. "Things went to the brink because Discover may have had a tougher case to prove or more unrealistic expectations of the amount of money they might get," Wildfang says. "But when the parties were facing an actual trial, they decided settlement was a better option all around."
