Evan Schuman's StorefrontBacktalk

The last thing an alternative mobile payments vendor needs is to discover that someone else holds the patent to key technology. In the case of Square, the alternative payments vendor with the little card-swiper that plugs into an iPhone, it’s worse: Square’s founders are now in the early stages of a lawsuit over a patent for technology they not only thought they had invented but for which they actually paid the filing fee of said patent, which actually ended up with someone else’s name on it.

That’s definitely not the kind of problem any retailer wants when it comes to payments processing. You expect that a startup will have to build a customer base, service infrastructure and even technology from the ground up. None of which is easy. But Square’s story turns out to be one that mixes friendship, betrayal, electronics, glass blowing, legal shenanigans and Rashomon-like conflicting stories. In short, way more drama than retailers want from a vendor, even one with interesting technology and the promise of cutting the cost of payment-card processing. When it comes to payments, boring would definitely be better.

The story, outlined in documents from a federal lawsuit filed in St. Louis, Mo., in December, goes like this: Square co-founder James McKelvey is a software engineer and a glass blower who creates glass art, which he sells on the side. But McKelvey couldn’t accept payment cards for his glass art, so he lost some sales.

Then, as the lawsuit puts it: “In or about February 2009, in a flash of inventive insight, Mr. McKelvey conceived of using a cell phone to process credit card payments. Mr. McKelvey conceived of an invention in which a card reader for reading magnetic card stripes such as those found, for example, on credit cards, debit cards, gift cards and the like, would be plugged into a cell phone input jack. Mr. McKelvey also conceived of a magnetic card reader that is small in size so that it would not be cumbersome and would easily plug into a user’s cell phone.”

McKelvey talked to his friend and Twitter co-founder Jack Dorsey who, the lawsuit says, thought using a phone’s camera would be a better way to go. But McKelvey stuck by his idea for a little swipe device. He took the idea to his longtime friend, Washington University electrical engineering professor Robert Morley Jr., for help developing it. Once they built and refined several prototypes—the final design was based on a circuit McKelvey suggested, the lawsuit says—they asked patent lawyer David Chervitz to do a patent search and file for a patent on the invention.

Chervitz did—but only Morley’s name appeared on the application and the patent.