Oct. 14 (Bloomberg) -- Discover Financial Services, the fourth-biggest U.S. credit-card company, settled an antitrust suit in which it sought $18 billion from larger rivals Visa Inc. and MasterCard Inc. for blocking banks from issuing its cards.

The accord came as trial was to begin today in Manhattan federal court. While terms weren't disclosed, UBS AG analyst Adam Frisch in New York wrote ``industry sources'' said the case settled for $2.8 billion, of which $1 billion will go to former Discover parent Morgan Stanley. MasterCard will pay $900 million and Visa $1.9 billion, Frisch said in a client note. Discover surged 11 percent.

``This settlement was at the higher end of our expectation range but not at a level that represents a material surprise,'' the analyst wrote. The three credit card companies said in statements that details of the accord are still being negotiated.

U.S. District Judge Barbara Jones in Manhattan ordered Visa and MasterCard in 2001 to stop forcing banks to choose between their cards and ones from Discover and American Express Co. Her order came after the Justice Department sued the credit card giants for antitrust violations. The U.S. Supreme Court refused to review the ruling on Oct. 4, 2004. Discover sued the same day.

Illegal Restraints

Jones had said she would tell the jury Visa's and MasterCard's rules were illegal restraints on trade. Jurors were then to decide whether Discover was harmed by the practices, and by how much.

Discover, based in Riverwoods, Illinois, rose $1.16, or 11 percent, to $11.76 in New York Stock Exchange composite trading. Morgan Stanley rose $3.84, or 21 percent, to $21.94.Visa fell $1.26 to $57.61, and MasterCard rose 47 cents to $174.07.

Pretrial rulings in Discover's favor and the potential size of the award may have prodded Visa and MasterCard into settling.

Visa, based in San Francisco, is the largest credit-card company, with 51 percent of the U.S. credit- and debit-card market last year, according to the Nilson Report, which tracks the card industry from Carpinteria, California.

MasterCard, the second-largest card company and based in Purchase, New York, accounted for 28 percent. New York-based American Express is third with 17 percent, according to the newsletter. Discover's share of the market was 3.8 percent.

The value of U.S. credit card purchases was $2.17 trillion in 2007, up from $426 billion in 1993.

Morgan Stanley Agreement

Under its agreement with New York-based Morgan Stanley, which spun off the card company last year, Discover would pay it the first $700 million recovered, or 22 percent of the bank's net income of $3.2 billion last year.

The bank was also to receive half of any settlement proceeds above $1.5 billion, up to a maximum of $1.5 billion, according to regulatory filings. Morgan Stanley spokesman Mark Lake declined to comment.

Visa has agreed to pay the bigger share of any verdict of settlement, primarily based on relevant business volumes, MasterCard and Visa said in second-quarter filings.

Visa said in its statement today that it set aside $3 billion from an initial public offering in March for several cases, including the Discover lawsuit.

David Robertson, president of the Nilson Report, said Discover may use settlement proceeds to partner with small financial institutions and convert to Discover any cards they issued from Visa or MasterCard.

``The other option would be to expand internationally,'' he said of Discover, which paid $165 million this year for Citigroup Inc.'s Diners Club International.

American Express, which sued MasterCard and Visa separately, settled for $1.8 billion from MasterCard in June and $2.25 billion from Visa and its bank partners last year.

The case is Discover Financial Services Inc. v. Visa USA Inc., 04-cv-07844, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin at the federal court in New York at dglovin@bloomberg.net.

Last Updated: October 14, 2008 21:53 EDT