Discover Financial Services claims in a lawsuit that it was forced to agree to a $2.75 billion legal settlement because its former parent, Morgan Stanley, held secret, unauthorized talks with Visa Inc. and MasterCard Inc.

Discover agreed to accept $2.75 billion to resolve an antitrust case it brought against rivals Visa and MasterCard, the world’s largest credit card networks. As part of the deal, Morgan Stanley, which spun off Discover last year, was expecting $1.2 billion. Announcing the settlement in October, Discover said Morgan Stanley had breached their agreement and wasn’t entitled to the money.

In response to a lawsuit brought by Morgan Stanley, Discover now says its former parent held secret talks with Visa and MasterCard before the start of a scheduled trial and upended Discover’s legal strategy.

“Morgan Stanley’s inappropriate communications and side deals with Visa and MasterCard undermined Discover’s litigation strategy and harmed its settlement terms,” Discover said yesterday in an e-mailed statement.

“There is absolutely no basis for Discover’s claim that the agreement was breached,” Mark Lake, a spokesman for New York-based Morgan Stanley, said yesterday in a phone interview. The firm “is due to receive approximately $1.2 billion pretax.”

The dispute between Discover and MasterCard in New York State Supreme Court in Manhattan follows four years of litigation between Discover and its larger rivals. Discover, which claimed Visa and MasterCard blocked banks from issuing its cards, settled the case on the eve of trial.

Deal Rejected

Discover has said the $2.75 billion settlement will allow it to improve its balance sheet and expand internationally.

Visa, based in San Francisco, and Purchase, New York-based MasterCard aren’t parties to the new dispute between Morgan Stanley and Riverwoods, Illinois-based Discover.

In its Nov. 17 counterclaim in Morgan Stanley’s lawsuit, Discover says Morgan Stanley reached a tentative $700 million deal with MasterCard and Visa shortly before the investment bank spun off Discover in 2007. Visa ultimately rejected the deal. Visa’s share of the settlement announced two months ago was $1.8875 billion.

Discover says it didn’t learn until Oct. 13, the day before the trial, that Morgan Stanley had secretly resumed talks with Visa and MasterCard. At that point, Morgan Stanley and Discover were split on whether to accept a mediator’s $2.7 billion settlement proposal, Discover said.

Damages Capped

Morgan Stanley wanted to accept the mediator’s proposal because its potential recovery in the case was capped at $1.5 billion under a contract with Discover. Discover was hesitant because it was seeking damages that could have reached $18 billion, after being tripled under antitrust law, according to the claim.

Morgan Stanley’s actions forced Discover to choose between accepting the $2.75 billion proposal while “risking the possibility that Visa and MasterCard would not accept it” after their talks with Morgan Stanley, or “risking a trial without knowing whether its privileged and confidential information had been disclosed to its opponents,” Discover said.

Discover said it felt compelled to settle. The company is seeking undetermined damages and an order declaring it’s not required to pay $1.2 billion to Morgan Stanley.

Morgan Stanley says in its complaint that Visa approached the bank, asking whether it would accept less than it was entitled to under its contract with Discover, to facilitate a settlement.

Morgan Stanley eventually agreed to give Visa $100 million of its share of the proceeds. The bank now seeks a ruling that it didn’t breach its contract with Discover.

The case is Morgan Stanley v. Discover Financial Services, 08-603017, New York State Supreme Court (Manhattan).