The recent settlement of a major lawsuit against Square, the
credit card processing company once valued at US$6 billion (and now
$3 billion), is a cautionary tale as to why startups and their
founders must build their business upon the strongest possible
corporate and intellectual property foundation.
The lawsuit, brought by Robert Morley, a former colleague of
Square's co-founders, was reported in Square's most recent
financial statements to have been settled for US$50 million.
In early 2014, Morley brought an action for claims including
breach of fiduciary duty and patent infringement against Square and
its co-founders, Jack Dorsey and James McKelvey. Morley sought
damages and to be added as an owner of Square's patents.
Morley, a college professor and entrepreneur, alleged that he
collaborated with Dorsey and McKelvey to design a system that
accepted credit card payments through a mobile phone. In February
2009, Morley, Dorsey and McKelvey formed a joint venture to focus
on their collaboration. Morley alleged that he then created the
hardware that Square employed as its first credit card reader, and
contributed his substantial knowledge of the credit card industry
to the collaboration.
According to statements filed in the lawsuit, Dorsey and
McKelvey redirected revenue from their joint venture with Morley to
a separate company, which would eventually become Square. Although
he participated in inventing and patenting the technology, Morley
received no ownership interest in Square and was not compensated
for the company's use of his work.
Avoiding Trouble Down the Road
When multiple parties work together to develop designs and
prototypes for new products, the ownership of the intellectual
property may come into question. One of the easiest ways to avoid
or minimize the risk of disputes arising from the development of
new products is for the collaborators to formally establish their
relationship and ownership rights at the outset in a shareholders
agreement and with properly documented intellectual property
It is often best for collaborators to incorporate a company
through which to run their business. After incorporation, the
founders can enter into a shareholders agreement to set out their
rights and obligations with respect to the company. It is then
integral to ensure the company establishes all of its ownership and
intellectual property rights created in the course of collaboration
by taking an assignment of the intellectual property. It is crucial
that intellectual property rights and founder relationships are
properly documented to minimize the potential for dispute between
The Morley, Dorsey and McKelvey lawsuit could have been avoided
had the parties understood and clarified their interests and the
ownership of the intellectual property from the outset.
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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