Morley v. Square, Inc.
| Decision Date | 22 April 2016 |
| Docket Number | Case No. 4:14cv172,Case No. 4:10cv2243 SNLJ CONSOLIDATED |
| Parties | ROBERT E. MORLEY, JR., et al. Plaintiffs, v. SQUARE, INC., et al., Defendants. and SQUARE, INC., et al. Plaintiffs, v. REM HOLDINGS 3, LLC, Defendant. |
| Court | U.S. District Court — Eastern District of Missouri |
Square, Inc. is a business that allows anyone with a Square account and a smartphone to take credit card payments by inserting a small, square-shaped credit card reader ("Square Reader") into the headphone jack of a smartphone, swiping the card through the reader, and processing the card using the Square application on the smartphone. Dr. Robert Morley and his company REM Holdings 3, LLC claim that the defendants1 --- Square, Jack Dorsey, and Jim McKelvey --- improperly use his contributions to the defendants' "Square Reader" technology and wrongfully cut him out of the now billion-dollar business. The Counts that remain unstayed in this case pertain to plaintiffs' state law claims for joint venture, trade secret, and related claims. Defendants have moved for summary judgment on all of plaintiffs' claims (#296). The matter has been fully briefed and is now ready for disposition.
Defendants Dorsey and McKelvey previous worked together at McKelvey's company, Mira, Inc., in the 1990s. By 2008, Dorsey had gained notoriety as being among the founders of the social media platform Twitter, Inc. Dorsey and McKelvey began working together again in late 2008 and early 2009 on a new business enterprise that would allow individuals to take credit card payments using a smartphone. At the time, Dorsey lived in San Francisco, and McKelvey lived in St. Louis, Missouri. McKelvey traveled between St. Louis and San Francisco multiple times to discuss the business idea with Dorsey.
Morley was and is an Associate Professor of Electrical Engineering at Washington University in St. Louis, Missouri, who studies, among other things, magnetic stripe technology. McKelvey had been friends with plaintiff Morley for years, so in 2009 he contacted Morley about the business idea. Morley testified that McKelvey told him, McKelvey and Morley met on February 5, 2009, at Morley's home, where McKelvey told Morley about the plan to accept credit card payments using a smart phone's camera, which would use Optical Character Recognition ("OCR") to read the credit card numbers and charge the card. Morley testified that he told McKelvey, Then McKelvey responded "we don't know how," and Morley told him he could show them how --- that he could "make a little reader that will plug into the [smartphone's] headset jack and read the mag stripe." Morley built a prototype for the headset jack card reader on February 19, 2009.
Meanwhile, Dorsey had engaged Tristan O'Tierney, a software engineer, in January 2009 to help with the business, and Dorsey and McKelvey had dinner with Greg Kidd, who had startup and banking experience, on February 10, 2009, to discuss the payments industry and business ideas. McKelvey, Dorsey, and O'Tierney began working on the business in Dorsey's apartment on February 11, 2009. O'Tierney also emailed a first build of the smartphone application to Dorsey and McKelvey on February 11. OnFebruary 13, McKelvey and Dorsey formed JDJM LLC in Missouri, named after their initials and for the purpose of "payment processing."3
In addition to Dorsey, McKelvey, Kidd, Morley, and O'Tierney, a number of consultants, contractors, and advisors helped developed what would become Square.
Dorsey and McKelvey paid contracting fees to O'Tierney, Anderson, Redding, Walters, and Wen and reimbursed consultants and contractors for expenses. Dorsey and McKelvey also established banking and credit card processing relationships on behalf ofthe business, made decisions regarding the direction and implementation of the business, and invested $300,000 of their own money in the first year of the business.4
In June 2009, Dorsey and McKelvey initiated discussions regarding equity grants for consultants, advisors, and employees. The business was incorporated in Delaware as Seashell, Inc. on June 17, 2009, and the business's name was changed to Square, Inc. on August 7, 2009.5
As early as February 2, 2009, McKelvey told Morley in an email that he'd be "in the brain-trust with [McKelvey's] new work." It is undisputed that no one used the term "partner," "co-owner," or "joint venture" in McKelvey's talks with Morley. However, McKelvey spent time with Morley on February 16 in Morley's lab learning about magnetic stripe readers, and Morley built a prototype card reader device that plugged into the audio jack of an iPhone on February 19. That same day, Morley forwarded an email capture of this card read to himself and his son and then to McKelvey and Wen. Morley continued to work on the card reader prototype for the business from St. Louis, approximately 100-160 hours from February through October 2009. McKelvey took over hardware developmentwhen manufacturing began. Morley also worked with Wen on decoding algorithms6, introduced McKelvey and Dorsey to a potential investor and business contacts, and recommended a parts supplier and hardware manufacturer in China.
On March 24, 2009, McKelvey forwarded his and Dorsey's proposed business plan to Morley noting that Dorsey intended to have "some sort of stock deal for the 'advisors.'" That business plan included the following:
Morley replied to McKelvey's business plan email on March 25. He did not object to the content or to his identification as an advisor, suggesting only that McKelvey add information to Morley's biography and noting that the document needed some grammatical correction. Defendants note that Morley did not address that Dorsey and McKelvey were listed as the sole owners of the business; however, Morley responds that the document did not actually say that Dorsey and McKelvey were the sole owners.
Dorsey and McKelvey testified that they always viewed Morley as an advisor, not as a partner or co-owner. Contractor O'Tierney stated that he had the same view and that Morley's "contributions were temporary in that once we got the audio decoding functional, we wouldn't have needed his help anymore."
Although Morley stated he had "under a thousand" dollars in unreimbursed expenses, defendants state that he otherwise bore no financial risk of loss as did Dorsey and McKelvey. Morley was advised of Dorsey and McKelvey's plans to incorporate in June and expressed no objection or concerns.
On July 8, 2009, Morley wrote to his friend Bruce Baebler (who is also a stakeholder in Morley's company, defendant REM Holdings) that the "company has been incorporated and I need to negotiate what my contribution is worth in equity."
On May 14, 2009, Morley emailed attorney David Chervitz a document entitled "PayBySquirrel Patent Disclosure.docx", copying McKelvey. The document said, "[a]s we discussed on the phone a couple of weeks ago, we'd like to seek patent protection for intellectual property we have developed since early February of this year," listing two credit card system/methods for collecting payments. A patent application was filed June 10, U.S. Patent Application Ser. No. 12/456,134 ("the '134 Application"), titled "Card Reader Device for a Cell Phone and Method of Use" and naming Morley as...
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