The Work

December 8, 2008 9:15 AM

Discover's Suit Against Morgan Stanley Heats Up

Posted by Ed Shanahan

By David Bario, The Am Law Litigation Daily

Remember when it seemed like Discover's $2.75 billion antitrust settlement with MasterCard and Visa was big news? Well, it's beginning to look like the real story of the case hasn't yet been told. The settlement has sparked a potentially nasty (and expensive) oedipal battle, with Discover accusing its now struggling former parent, Morgan Stanley, of forcing it into a premature deal in order to score some much needed cash for the bank. Morgan Stanley and Discover have already exchanged a juicy set of briefs, but the battle is expected to escalate this week, when the bank answers Discover's charges of breach of contract and tortious interference.

Here's the backstory. This fall, with banks collapsing right and left, Morgan Stanley was desperate for cash. The bank saw an opportunity in settlement negotiations then underway in Discover's antitrust case against rival credit card companies Visa and MasterCard. Under the terms of Morgan Stanley's 2007 spinoff of Discover, the bank was entitled to almost half of Discover's antitrust recovery--up to a total payment of $1.5 billion. So even though Discover had claimed that the antitrust case was worth up to $18 billion, Morgan Stanley stepped into settlement talks and pushed the credit card companies to accept a $2.75 billion deal. The bank even offered to take $100 million less from Visa than it was due.

But Discover balked at paying Morgan Stanley its share of the settlement. In late October, Morgan Stanley's lawyers at Cravath, Swaine & Moore filed for a declaratory judgment against Discover in New York State Supreme Court, seeking to force Discover to turn over the $1.2 billion Morgan Stanley says it's owed.

Discover fired back with an answer and counterclaim that suggest Morgan Stanley has a long and uphill battle ahead. Discover claims that Morgan Stanley violated an agreement giving Discover sole control over the antitrust litigation, and accuses the bank of engaging in secret negotiations of its own with Visa and MasterCard. The spinoff's lawyers at Bartlit Beck Herman Palenchar & Scott assert that Morgan Stanley forced Discover to agree, on the eve of trial, to accept a settlement for far less than Discover might have won in the courtroom. They're arguing that Discover not only doesn't have to pay Morgan Stanley its share of the settlement but that Morgan Stanley owes Discover damages for its interference in the antitrust case.

Bartlit Beck's Christopher Lind says that with Morgan Stanley's share of any settlement in the antitrust case already capped at $1.5 billion, the bank had little incentive to wait for Discover to go to trial instead of pushing the backdoor $2.75 billion settlement--especially given its cash-strapped situation. "Morgan Stanley basically couldn't have gotten a better deal," Lind told us.

We called Cravath partner Daniel Slifkin, who's handling the case for Morgan Stanley along with presiding partner Evan Chesler, but he referred us to Morgan Stanley. A bank spokesman told us "there is absolutely no basis for Discover's claims."

Discover was represented during the antitrust case by Kirkland & Ellis and Constantine Cannon, but when it came time to litigate with Morgan Stanley--a Kirkland client--the credit card company turned to Bartlit Beck. Partners Philip Beck and Hamilton Hill are working with Lind on the case. New York's Kleinberg, Kaplan, Wolff & Cohen is also representing Discover.

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