Square, the mobile payments startup was founded in May 2010 by Jack Dorsey and James McKelvey.  The company makes it easy for individuals and small businesses to accept credit card payments by providing a mobile app and card reader for various mobile operating systems.  Though mobile payments is a crowded space with heavyweights such as PayPal and Intuit GoPayment, The company has received funding from angel investors such as Marisa Mayer, Biz Stone and Kevin Rose and has received funding from Khosla Ventures, Sequoia Capital and Kleiner Perkins.

The key to Square’s business model is its card reader.  The company was recently in the news for inking a deal with retailers such as WalMart to sell their reader in stores for $10.  Though it has been around for a relatively short time, Square is already no stranger to IP disputes.  In fact, it appears that Square might not even own the patents on the card reader.  Square entered into litigation over the ownership and inventorship of patent No. 7,810,729, directed to the card reader, in late 2010. The ’729 patent is assigned to REM Holdings 3, Inc and currently lists Robert E. Morley Jr. as the sole inventor.  Morley, a professor, allegedly designed the card reader technology for Square based on McKelvey’s idea.  Morley wanted to assign the technology to Square in exchange for some percentage of the company, but a deal was not reached.

Thus far, it appears that there has been no resolution between Square and REM Holdings.  In fact, Square has taken the step of requesting the USPTO to perform an inter partes reexam of three REM patents.  This means that Square is currently trying to invalidate the patents to the technology on which its card reader was apparently built on.  According to PAIR, the USPTO has accepted the reexamination request and issued a Non-final office action.  This is a very interesting situation that shows how important it is for startups to have strong invention assignment agreements with cofounders, employees and contractors to make sure that all intellectual property created by those working for the company is assigned to the company.

While Square is involved in the various proceedings with REM Holding regarding the card reader patents, it has already compiled a number of other patents and patent applications.  In particular, Square owns two  U.S. Patents and several U.S. Patent Applications.  U.S. Patent Nos. 7,376,431 and 7,684,809 are both directed to location-based fraud reduction.  Interestingly, both patents are based on provisional applications filed in 2002 (at least 7 years prior to the founding of Square).  The patents list Brian J Niedermeyer as the inventor.  A number of other U.S. Published Patent Application are directed to areas such as transactions through miniaturized card readers (2011/0084139), passive identification circuitry (2011/0084147), decoding card swipe signals (2011/0084140), transactions without sharing card information (2011/0084131) and dynamic receipt generation with environmental information (2011/0087596).  It is worth noting that each of these patent applications was filed on October 13 2010, about two months prior to the lawsuit against REM Holdings begin filed and about six months after the company was founded.

Clearly, Square’s IP dealings will be worth monitoring as the company grows.  It will be interesting to see whether there will be any repercussions from Square’s failure to secure the card reader patents and if the reexam is successful.