Mobile payments startup Square finds itself in a legal pickle

The high-profile startup Square has filed a lawsuit against a company to clear up the rights to its invention, which allows you to pay for products by swiping your credit card into a card reader plugged into your mobile phone.

Square and its chairman Jim McKelvey have filed a lawsuit against REM Holdings 3 because of a dispute over the filing of a patent that is fundamental to Square’s business.

Based on Square’s version of the story, inventor McKelvey couldn’t sell a piece of glass art because he couldn’t accept a credit card as a payment. He moved on to invent the simple reader device that plugs into a mobile phone and carries out the transaction via the phone network.

McKelvey worked with Jack Dorsey, co-founder of Twitter, to set up Square as a startup to exploit the invention. About the same time, in February, 2009, McKelvey consulted his friend Robert Morley to help build a prototype magnetic card reader that could be plugged into a cell phone jack.

They built a working prototype that used a circuit designed by Morley. That circuit takes the card’s magnetic stripe and turns it into an audio signal the iPhone can process. They contacted a patent attorney, David Chervitz, to search for other patents. Then Chervitz filed a patent application in June, 2009. The patent was granted — No. 7,810,729 — but McKelvey’s name was inadvertently left off the application. Only Morley was awarded the patent.

Morley, an associate professor of electrical engineering at Washington University, said in an interview in 2009 that he had planned to assign the patent to Square in exchange for shares in the company, but the two sides couldn’t agree on the amount of shares. Square says they tweaked the design and did not use Morley’s circuit. In any case, Square argues that the patent should have had both names.

[via TechCrunch]