Fast Company

iPhone Credit Card Gizmo Square Sparks Legal IP Spat

SquareThe innovative iPhone peripheral Square, designed to bring credit card accepting skills to the the masses, is the subject of an IP battle centered around the initial invention of the idea.

Square was dreamed up by artist-inventor Jim McKelvey when, frustrated he couldn't sell one of his creations because he had no credit card processing facility, he realized a smartphone could be used to his benefit--and that of millions of small-scale vendors. So he created a device to convert magnetic strip info from a card into data that a specific iPhone app could understand--turning his concept into a realizable product that had the benefit of being very cheap to produce. McKelvey brought in Twitter co-founder Jack Dorsey as a partner, and money-man, and the rest is history.

Or perhaps not. At about the same time as involving Dorsey, McKelvey asked his friend Robert Morley to build a working prototype, presumably so that his business pitch could be more compelling. Morley designed a circuit that converted the magnetic signal into an audio one (actually a simple circuit, involving a tiny clutch of cheap components) and built the prototype with McKelvey. The two sought a patent attorney, who checked for prior art then filed a patent in June 2009. It only had Morley's name on it. Morley has noted he wanted to assign patent rights to Square in exchange for shares, but the two sides couldn't agree on the exact amount.

So Square has now brought legal proceedings against REM Holdings 3 to "clear up" ownership of the IP, which Square alleges should have included McKelvey as a co-inventor in any case.

Square could only offer us a "no comment" due to the ongoing legal battle. But they did point us to some different coverage of this story online, in which Morley's spokesman also had "no comment."

We'll have to see how this story plays out when the lawyers get to work. The peripheral device is only a small piece of what makes Square's business innovative--everything from the way the receipts are designed to the fee structure and how Square interacts with banks has been re-thought. And the fact that Square has the potential to be much more than a peripheral device company means that there will likely be a fair amount of money at stake in this suit.

Meanwhile, online comic XKCD has recently perfectly summed up the weaknesses of patent law:

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3 Comments

  • sheel

    Here's a cool calculator to get a sense for whether Square is right for your business or a credit card processor would be better...
    http://feefighters.com/square-...
    It really depends on how much volume you do - although Square should really only be used if doing less than $1k/month in sales, because of how they hold your money.
    These guys (feefighters) also let you comparison shop on their site for rates.

  • lala

    I signed up for Square late September 2010 based on reviews and buzz. IT IS NOT WORTH IT. It's early December and I'm switching over to another company who has a monthly fee but a customer support phone number and a 48 hour deposit time.

    Square deposits the first $1000 but then holds the rest of your money for 30 days and deposits it in some illogical increment. Let's say you met your $1000 limit on the 20th; if you have a charge after that initial $1000 for example, on the 21st, you get some of it deposited 30 days later; if you had another charge on the 22nd, again, you get some of it 30 days later etc. You end up getting your money in small irregular increments which basically devalues your money.

    Think of having $100 but getting it in pocket change as $1 on one day, $7 a few days later; $4 a week later and so on and so forth.

    Plus if you do the math, their rates are high. You're better off with a monthly fee and lower rates.

  • abe solomon

    Interesting article on the patent. Square is actually a great system for those who process small amounts for a side business perhaps. the rates however, are much higher than one can get on a traditional merchant account. If you are serious about processing a traditional merchant account is the way to go. There are companies that will set up your cell phone without contracts or set up fees.