Who Created Square's Technology? Why Retailers Have Reason To Be Nervous

The last thing an alternative mobile payments vendor needs is to discover that someone else holds the patent to key technology. In the case of Square, the alternative payments vendor with the little card-swiper that plugs into an iPhone, it's worse: Square's founders are now in the early stages of a lawsuit over a patent for technology they not only thought they had invented but for which they actually paid the filing fee of said patent, which actually ended up with someone else's name on it.

That's definitely not the kind of problem any retailer wants when it comes to payments processing. You expect that a startup will have to build a customer base, service infrastructure and even technology from the ground up. None of which is easy. But Square's story turns out to be one that mixes friendship, betrayal, electronics, glass blowing, legal shenanigans and Rashomon-like conflicting stories. In short, way more drama than retailers want from a vendor, even one with interesting technology and the promise of cutting the cost of payment-card processing. When it comes to payments, boring would definitely be better.

The story, outlined in documents from a federal lawsuit filed in St. Louis, Mo., in December, goes like this: Square co-founder James McKelvey is a software engineer and a glass blower who creates glass art, which he sells on the side. But McKelvey couldn't accept payment cards for his glass art, so he lost some sales.

Then, as the lawsuit puts it: "In or about February 2009, in a flash of inventive insight, Mr. McKelvey conceived of using a cell phone to process credit card payments. Mr. McKelvey conceived of an invention in which a card reader for reading magnetic card stripes such as those found, for example, on credit cards, debit cards, gift cards and the like, would be plugged into a cell phone input jack. Mr. McKelvey also conceived of a magnetic card reader that is small in size so that it would not be cumbersome and would easily plug into a user’s cell phone."

McKelvey talked to his friend and Twitter co-founder Jack Dorsey who, the lawsuit says, thought using a phone's camera would be a better way to go. But McKelvey stuck by his idea for a little swipe device. He took the idea to his longtime friend, Washington University electrical engineering professor Robert Morley Jr., for help developing it. Once they built and refined several prototypes—the final design was based on a circuit McKelvey suggested, the lawsuit says—they asked patent lawyer David Chervitz to do a patent search and file for a patent on the invention.

Chervitz did—but only Morley's name appeared on the application and the patent.Chervitz did—but only Morley's name appeared on the application and the patent, #7,810,729, when it was issued. McKelvey says he just wants his name, and that of Square, on the patent.

Got all that so far?

Morley, the engineering professor, remembers things differently. He says McKelvey came to him with the idea of using a phone's camera to read a payment card, and it was Morley who suggested reading the mag-stripe. According to Morley's countersuit, "McKelvey indicated that he did not know how to do that. Dr. Morley said that he did, and he would show that it could work and McKelvey asked Dr. Morley to do so. Dr. Morley also indicated at the meeting that he could make a small credit card reader to plug into the external microphone input (audio output port) of a cell phone, such as an iPhone."

Morley says he was the one who built the prototypes (with help from McKelvey "at the direction and control of Dr. Morley," his countersuit says), created the circuitry and invented the reader. He also says that the lawyer, Chervitz, has always been his patent attorney, and McKelvey never paid for any of Chervitz's legal work. That's why, Morley says, only his name is on the patent. If Square wants to use it, the vendor will have to cut a deal with him.

Then there's the lawyer who's representing Morley in the lawsuit—his patent lawyer, David Chervitz.

Wait, you can't do that, said a lawyer for McKelvey in a letter to Chervitz. You'll be a witness in this lawsuit. Besides, you've previously represented McKelvey—that's a conflict of interest.

Chervitz's reply: "At all times my client was and has been Robert E. Morley, Jr. Further, I do not recall my invoice dated June 15, 2009, being paid by James McKelvey [and] it does not appear that I am a necessary witness to the question of inventorship."

McKelvey's lawyer then sent Chervitz a copy of Chervitz's invoice with McKelvey's name on it as client, and a canceled check from McKelvey with Chervitz's signature on the back—and pointed out that there were also multiple E-mails between Chervitz and McKelvey discussing the patent application. Chervitz didn't budge, and last Thursday (Jan. 20), McKelvey's lawyers filed papers to force Chervitz off the case. (We'd tell you what was in them, but most were sealed because they included attorney-client communications.)

That's the soap opera to date—and no one has even faced a judge yet.

It's easy to understand why McKelvey, as a co-founder of Square, wants his name on the patent—and why Morley, who doesn't own a piece of Square but would like to, wants sole ownership. It's harder to figure out why no one involved can tell a story that remotely agrees with anyone else's—including the lawyer who can't remember cashing checks or who his clients are.

And that isn't likely to make any retailer, big or small, feel more comfortable with Square.