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Another Reason Not to Snub a Co-founder

Partner splits in a startup can get ugly and expensive. But they also might have serious consequences for your patent protection.
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Partnerships are a difficult business structure. Not only can you have differences that may be difficult to resolve when all the partners have equal ownership, but a fallout can lead to bitterness and legal problems. Look at all the conflicts at Snapchat.

But there is another, hidden problem, and it's at the root of a current lawsuit against credit card processor Square--a patent problem. One that could seriously injure everyone's interest in the company.

Trouble at Square

Washington University professor Robert Morley has claimed that he actually invented the technology behind the successful payment venture started by Twitter co-founder Jack Dorsey and James McKelvey.

Morley first started taking legal action in 2009. His current suit claims that the duo cut him out of the business, even though he created the card reader and owned the basic patent. He's suing for such things as unjust enrichment, breach of fiduciary duty, patent infringement, misappropriation of trade secrets, and fraud.

Square reportedly sued Morley in 2010, claiming that McKelvey had been left off the initial patent.

Forget the he said/they said for a moment and consider the importance of a patent to a young company. Investors, particularly at the level Square has attracted them, want to see protection for new technologies. Without it, they fear a company could be outdone by a competitor who reverse-engineered the technology.

Who's a "True Inventor"?

When there's a dispute, patents become a key tool in the fight. The same has been true in the Snapchat disputes. And the sticking point comes if someone or other decides to leave partners off the patent application. Under U.S. law, the "true and only" inventors must be listed on a patent application.

A true inventor is someone who came up with the concept of at least one claim in the patent application or who is one of two or more people who collaborated. Simply coming up with an idea or offering an improvement to it doesn't bring someone to the level of inventor.

There can be legitimate dispute over who should be included as an inventor. If someone has been accidentally omitted, the application, or even a final granted patent, can be appropriately amended. The problem arises when there is deceptive intent. In that case, the patent can be declared invalid. When that happens, everyone involved loses, because the patent cannot be enforced.

In other words, if there is any deception going on, there's a reasonable chance that the company will lose its legal protection. In that case, there's also a good chance that lawyers for savvy investors have covered that potential eventuality and created a clause that lets the people with the money walk away.

The takeaway from all of this? It's far easier to work out problems in advance, realizing that your half or third portion of the loaf is better than none, and especially better than putting everyone's work at risk.

Last updated: Feb 7, 2014

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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