As payments startup Square Inc. gains customers and interest from investors, a long-simmering legal battle over its technology is flaring again in federal court in St. Louis.
Robert Morley, an associate professor in Washington University’s engineering department, is suing Square and its co-founders Jack Dorsey and Jim McKelvey, claiming that he was unfairly cut out of the Square enterprise after developing key software.
In Thursday’s lawsuit, Morley alleges breach of fiduciary duty, unjust enrichment, patent infringement and fraud against Square and its co-founders, among other allegations. Morley seeks an unspecified amount of damages.
Square, a small plastic device that plugs into mobile devices including smartphones and iPads and processes credit card transactions, was founded in 2009 by McKelvey, a Clayton resident and co-owner of Third Degree Glass Factory in St. Louis, and Dorsey, a St. Louis native who also was one of the co-founders of Twitter. Dorsey is CEO of Square, which is headquartered in San Francisco and has an office in St. Louis.
Square has since expanded its payment services into retail outlets with Square Stand, a device that processes credit cards on the iPad. Square said in May 2013 it was processing $15 billion in payments, not including at Starbucks stores.
Morley, who lives in University City, already is enmeshed in a longstanding dispute with Square over the device’s origins.
In December 2010, Square and its co-founders filed a lawsuit against Morley’s company, REM Holdings 3 LLC, alleging McKelvey was wrongly left off a patent for the card reader device. That lawsuit remains pending.
The legal dispute has grown to encompass several patents, and at least one of the patents was canceled by the U.S. Patent and Trade Office after a review. The patent office is currently reviewing other patents related to Square’s technology.
McKelvey came up with the idea for a credit card reader after he had trouble processing a credit card for a customer at his glass business, McKelvey told the Post-Dispatch last year, and he contacted his friend, Dorsey, to develop it. McKelvey then contacted Morley, who holds several patents on magnetic card-reading technology, to develop a prototype.
In the new lawsuit filed Thursday in U.S. District Court in St. Louis, Morley alleges he alone invented the Square card reader and the magnetic stripe decoding algorithms on Square’s app.
“He created what became the Square reader; that was Professor Morley’s technical contribution,” said Morley’s attorney, Brad Caldwell. “He also contributed a lot to the business side, helping them understand the way credit cards are processed.”
Square Inc. has grown to a valuation of $5 billion as a result of Morley’s contributions, his lawsuit alleges.
“Mr. Dorsey and Mr. McKelvey conspired with the objective of owning the lion’s share of the company and excluding Dr. Morley from receiving his share as a co-founder,” the lawsuit alleges.
Square plans to vigorously fight the lawsuit, according to spokesman Aaron Zamost.
“It’s not surprising that Morley would file another desperate, baseless patent lawsuit given how poorly his initial claims have been received by the patent authorities,” Zamost wrote in an email to the Post-Dispatch, referring to counterclaims Morley made in the 2010 case.
Speculation has centered on whether Square will pursue an initial public offering this year. Dorsey, who remains executive chairman at Twitter Inc., helped lead an IPO of Twitter in November.
How quickly Square can resolve the litigation over patents will be important to its growth plans, said Yvette Liebesman, an assistant professor of law at St. Louis University.
“It’s going to impact them regardless of whether they go public,” Liebesman said. “Who wants to buy stock in a company that’s facing a lawsuit that could cost them a lot of money? And, a lawsuit can impact their ability to get investors even if they remain privately held.”