By Lisa Brown, St. Louis Post-Dispatch
A trial slated to begin today in a long-running legal dispute over the creation of the Square credit card reader was canceled after the company finalized a settlement with a Washington University professor and his corporation, REM Holdings 3.
San Francisco-based Square Inc. recorded a $50 million charge related to the settlement in its most recent quarter, according to a regulatory filing last month. Jury selection was slated to begin June 13 in federal court in Cape Girardeau but Square's attorneys have notified the court that a settlement was reached, averting trial, judicial assistant Sandra Moore confirmed Monday.
In December 2010, Square sued REM Holdings 3 in the Eastern District of Missouri, alleging Jim McKelvey was wrongly left off a patent for Square's credit card reader device. McKelvey's St. Louis-based glass art business, Third Degree Glass Factory, lost a sale when it couldn't process a customer's credit card, McKelvey told the Post-Dispatch in a 2013 interview.
Square's lawsuit alleged that after McKelvey came up with the idea for processing credit cards using a smartphone, he contacted his friend and St. Louis native Jack Dorsey in 2008 about developing the invention and in 2009 met with Robert Morley Jr. to discuss developing a prototype. Morley is an associate professor of engineering at Washington University and a member of REM Holdings 3.
Morley, who lives in University City, sued Square and its co-founders McKelvey and Dorsey in 2014, alleging the professor was unfairly cut out of the Square enterprise after developing key software. Tech entrepreneur Dorsey is now CEO of Square and Twitter.
"The publicized origin story of Square Inc. is a fabrication," Morley's lawsuit stated, adding he alone invented the Square card reader. "Dr. Morley had over a decade of experience in the credit card industry, spanning card reader technology, industry contacts, and business operations," Morley alleged in his lawsuit. "In contrast, Messrs. Dorsey and McKelvey had no noteworthy experience in the credit card industry."
Through his attorney, Morley declined to comment for this story. After earning his doctorate in electrical engineering from Washington University, Morley joined the faculty in 1981, according his on the school's website, and he holds multiple patents for magnetic stripe card verification systems.
Square refuted Morley's claims that McKelvey and Dorsey approached Morley to be a co-founder of Square, according to court documents. "Dorsey and McKelvey assumed all of the early financial risk, personally financing the business operations from the start," Square's answer to Morley's lawsuit stated. "Morley did not contribute capital to the business or put personal funding at risk."
Square's small plastic device that plugs into the audio jack of smartphones and iPads allows the magnetic stripes on credit cards to be read to process payments. Square has since expanded to include other products, including a device that processes chip credit cards and accepts Apple Pay.
Square, which went public in November 2015, opened a St. Louis office in the Cortex district in the Central West End last year. The company reported net revenue of $379.3 million in its most recent quarter.
In a regulatory filing May 6, Square said it signed a binding term sheet with Morley and REM Holdings on a settlement and recorded a $50 million charge for the quarter that ended March 31, although the settlement was not finalized at the time. According to court documents, REM Holdings has several co-owners in addition to Morley.
The regulatory filing followed a judge's decision in April to deny Square summary judgment.
A Square spokeswoman declined to comment on the finalization of the settlement. When the all-cash settlement was disclosed as part of its earnings report last month, Square's CFO Sarah Friar said in a call with reporters: “We’re very happy to put this behind us,” according to Forbes Magazine.
In a statement to the Post-Dispatch, Morley's attorney Bradley Caldwell of the Dallas law firm Caldwell Cassady & Curry said: "The matter has been resolved on mutually agreeable terms, but those terms are confidential. The parties are pleased to put the dispute behind them."
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