Morgan Stanley Wins Summary Judgment Against Discover

On January 4, 2010, the New York State Supreme Court granted summary judgment to Cravath client Morgan Stanley on its breach of contract claim against Discover Financial Services. In the opinion, the Court found that Discover had an obligation to pay the amount of a special dividend claimed by Morgan Stanley as per a 2007 agreement.

In 2007, Morgan Stanley spun off Discover pursuant to the terms of a Separation Agreement. The Separation Agreement provided that Discover would pay Morgan Stanley a portion of the proceeds it would receive from the resolution of an antitrust suit, pending at the time of the spin-off, it had brought against credit card issuers Visa and MasterCard. The agreement further provided that Discover would have “sole control” over the antitrust case.

When the antitrust suit settled in October 2008 for $2.75 billion, Morgan Stanley was entitled to approximately $1.3 billion (pre-tax) under the agreement. However, Discover refused to pay, asserting that Morgan Stanley communicated with the credit card issuers regarding the antitrust suit in material breach of the spin-off agreement. Morgan Stanley filed suit against Discover, seeking declaratory judgment that it did not breach the agreement. In response, Discover asserted various counterclaims, including material breach of contract and tortious interference. In December 2008, Morgan Stanley moved to attach the after-tax amount of the settlement proceeds to which it was entitled and, in March 2009, the court granted that motion and directed Discover to place that amount into escrow.

In February 2009, Morgan Stanley asserted an additional breach of contract claim against Discover for its failure to distribute its portion of the settlement proceeds and filed a motion in June 2009 for partial summary judgment on that claim. In granting this motion, the Court ruled that any alleged violation of the “sole control” provision by Morgan Stanley was not a material breach and cannot excuse Discover’s failure to pay Morgan Stanley its share of the settlement proceeds.

The Cravath lawyers involved in this matter include partners Evan R. Chesler, Daniel Slifkin and Michael A. Paskin and associates Jisun Park, Maura Caffrey Smith, Patrick Mair and Nicholas W. Sage.