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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