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Discover Financial Services will receive $2.75 billion from Visa Inc. and MasterCard Worldwide to settle its long-running antitrust lawsuit, the company announced late yesterday. Discover will receive $862.5 million from MasterCard this quarter, and Visa will pay Discover $1.89 billion over four quarters in 2009, assuming Discover hits certain quarterly performance levels in its network sales volume. The parties released the details two weeks after they announced a tentative agreement to settle the case just as jury selection was to begin for their trial in U.S. District Court for the Southern District of New York in Manhattan (CardLine, 10/14). The settlement total roughly is in line with analysts' expectations, and Discover's stock price rose about 6.5% on the news. Discover filed its lawsuit in 2004, shortly after the U.S. Supreme Court let stand a lower-court ruling in an antitrust case the U.S. Department of Justice won that forced Visa and MasterCard to abandon their exclusionary rules and allow their member banks to issue payment cards on rival networks. Discover sought $6 billion in damages, contending in its suit that Visa's and MasterCard's exclusionary rules hurt its potential for success. American Express Co. last fall reached a $2.24 billion settlement with Visa 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). Sanjay Sakhrani, an equity analyst with Keefe, Bruyette & Woods, declared the settlement "a big win" for Discover, particularly during the present economic slump. "The proceeds are expected to trickle in over a critical period of time and shore up (Discover's) already relatively strong capital position," he wrote today in a note to clients. The resolution of the dispute eliminates an "overhang" of uncertainties for Visa and MasterCard, he added. "Clearly, MasterCard's and Visa's settlements with American Express Co. provided some leverage for Discover and resulted in an amount not far from the amount AmEx ended up receiving, when arguably AmEx had a stronger case," Sakhrani wrote. Noah J. Hanft, MasterCard general counsel, said in a statement released yesterday that Discover's lack of market success "resulted from decisions that created a business model that is not attractive to bank issuers," but MasterCard chose to settle the lawsuit to avoid the uncertainty and distraction of a lengthy jury trial. "The result, which is in no way an admission of liability, is in the best interest of our shareholders, our customers and our company," Hanft said. Joseph W. Saunders, Visa CEO and chairman, said in a statement released yesterday that resolving the case "on reasonable terms is in the best interest of Visa and our clients, cardholders and shareholders." Visa noted earlier this year it had set aside most of the funds it will pay Discover in an escrow account established for the settlement when it conducted its initial public offering.
