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New York Start-Up Ventures Face Many Legal Hurdles

Some of the most impressive technology start-ups have some sort of dubious story of origin. It now appears that Square, a credit card processing firm, may be no different.

The company has been hit with a business lawsuit alleging breach of fiduciary duty and patent infringement by a professor who had worked with the co-founders prior to the establishment of the firm.

In Robert E. Morely, Jr. v. Square Inc., the professor claims in the federal court filing that he was wrongly cut out of the business that developed into Square, despite having invented the technology that became the company’s bread-and-butter.

The device in question is called a “dongle,” and it is able to scan credit card information and translate that data from the magnetic strip on the card into audio signals that can be processed by a smartphone. Essentially, it turns the phone into a credit card processing device.

The professor says not only did he invent the technology, but he patented it. The company would later file a lawsuit against the professor, saying that one of the co-founder’s names was wrongly omitted from that patent.

However, the professor alleges that the company obtained its patents using insight and knowledge it had gleaned from him.

According to the filing, one of the co-founders reached out to the professor about the possibility of founding a new business back in 2008. The two ran through several possible ideas before concluding that smartphones as credit card transaction processing devices would likely make the most sense.

At that point, the professor and the two other men founded a joint venture, which was to be the start of getting the business off the ground.

Prior to the start of this, the professor says, the two Square co-founders had been in the glass-blowing business. Their knowledge of the credit card industry was quite minimal, he alleges. His knowledge of the industry, however, was expansive, and he used this in order to create the technology.

But rather than launching Square from the joint venture, the two other men formed a separate company, later redirecting all revenue from that first joint venture into the new firm.

The professor was not given ownership stake in the new firm, but there are indications that he had planned on handing over the device patent to the company, which would in turn provide him with company shares.

However, that didn’t happen. Instead, Square filed additional patents that, per the professor, improperly incorporated his methods and insights.

Today, the company is valued at about $5 billion, and is slated to go public at some point next year. In his lawsuit, the professor demands monetary damages, as well as a requirement that he be added to the list of the company’s patent owners.

A spokesman for the company called the lawsuit “desperate” and “baseless,” and pointed out that initial claims by the professor have not been received well by patent authorities.

Still, there is enough evidence to suggest that this claim could be costly for the new company.

The Law Offices of Ira S. Newman provides business litigation representation in New York City, Long Island, Great Neck and throughout the area. Call 516-487-7375 or send us an e-mail.

Additional Resources:
Robert E. Morely, Jr. v. Square Inc., filed Jan. 30, 2014, U.S. District Court for the Eastern District of Missouri, Eastern Division
Lawsuit Questions Square’s Start-Up Story, Jan. 30, 3014, By Michael J. De La Merced, The New York Times
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Small Business Contracts With Feds Should Receive Legal Review, Jan. 29, 2014, New York Business Lawsuit Lawyer Blog