Square, Inc. et al v. REM Holdings 3, LLC
MEMORANDUM AND ORDER re: #296 MOTION for Summary Judgment / DEFENDANTS' MOTION FOR SUMMARY JUDGMENT filed by Counter Defendant James McKelvey, Jr., Consolidated Filer Defendant Jack Dorsey, Counter Defendant Square, Inc. IT IS HEREBY ORDERED that defendants' motion for summary judgment (#296) is DENIED. Signed by District Judge Stephen N. Limbaugh, Jr on 4/22/16. (CSG) (Main Document 351 replaced on 4/22/2016 with copy that contains signature and NEF regenerated) (CSG).
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
ROBERT E. MORLEY, JR., et al.
SQUARE, INC., et al.,
Case No. 4:14cv172
Case No. 4:10cv2243 SNLJ
SQUARE, INC., et al.
REM HOLDINGS 3, LLC,
MEMORANDUM AND ORDER
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
This matter consists of two consolidated actions. Case No. 4:10-cv-2243 has been
stayed in its entirety pending resolution of patent issues by the Patent and Trademark Office.
Morley and his company are the defendants in that case. Morley and his company are the
plaintiffs in Case No. 4:14-cv-172; the complaint in that matter includes three patent-related
counts that are currently stayed, but a number of state-law counts are active and are the subject of
discovery disputes addressed in this Memorandum & Order. “Plaintiffs” in this memorandum
therefore refers to Morley and his company.
The following facts are undisputed unless otherwise indicated.
Early business development
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, “I am
looking for something new to do. My friend Jack Dorsey just got elbowed out of Twitter.
We’re looking for something new to do. Do you want to play?” 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, “no you’re not. You’re going to read the
mag[netic] stripe. That’s what it’s there for.” 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. On
February 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.
Sam Wen was an engineer identified by Morley who was hired by McKelvey
in February 2009 to develop hardware and software.
Robert Anderson was a graphic designer hired in mid-February 2009 to
design the smartphone application for payment processing, including icons
Randy Reddig and Cameron Walters were software engineers who joined in
May 2009 to write code for back-end processing of credit cards on computer
servers and designed the business’s website.
Ryan Gilbert was a lawyer who consulted on legal issues and banking
relationships beginning in May 2009.
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 of
Plaintiffs note that only McKelvey is named as an “organizer” of JDJM LLC.
the 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 development
Plaintiffs contend that the $300,000 was not “invested” inasmuch as Dorsey and
McKelvey were reimbursed shortly after loaning the money to the business.
The business started out as “Squirrel,” with the card reader device called the “Acorn.”
The business’s email addresses used the domain “paybysquirrel.com” at first, but the business
name evolved with time.
when 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:
Under the heading “Executive Summary,” it stated that the “Squirrel
management team is headed by Jack Dorsey and Jim McKelvey, proven
entrepreneurs and innovators who began working together in 1993. Jack
and Jim have assembled a team of world-class experts.”
Under the heading “Management and Organization” and the subheading
“Ownership,” it stated that “Squirrel is currently a trademark brand of JDJM,
LLC, a Missouri Limited Liability Company owned by Jack Dorsey and Jim
McKelvey. Squirrel has begun the incorporation process in the State of
Delaware. When formed, JDJM, LLC will transfer all assets to the new
Under the subheading “Daily Management,” it listed “Jack Dorsey President and CEO[:] Jack Dorsey will oversee the daily operational issues
of Squirrel and will have ultimate decision-making authority” and “Jim
Algorithms in this context are the steps taken by a computer to solve a particular
McKelvey - Chairman of the Board[:] Jim McKelvey will ultimately chair
Squirrel’s board of directors and make sure Jack doesn’t go crazy. Jim’s
role within the company will continue to change as problems and
opportunities emerge, but is not anticipated to have a long-term managerial
role. Initially, Jim will focus on development of Squirrel’s customer service
organization. Jim is also responsible for establishing all institutional
relationships. Finally, Jim will supervise Acorn development.” (“Acorn”
was an early name for the Square card reader.)
Under the subheading “Professional and Advisory Support,” Morley’s
professional biography is presented under the subheading “Electrical
Engineering – Dr. Robert Morley.” Elsewhere, Morley is listed as “an
advisor to Squirrel” and his role is to “oversee Squirrel’s Acorn
The plan also identified Greg Kidd as an advisor in banking.
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.”
The patent application and equity negotiations
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 the sole
inventor. McKelvey personally paid attorney Chervitz his fees and for the costs of the
On June 23, 2009, Dorsey emailed Morley about Morley’s “ongoing role with the
company,” stating that “we’d love to have you participate as much as possible” and
suggesting an advisor role “with equity and some lightweight structure around what the
company can expect from your participation….Also, in accordance with transferring the
rights of the patent over to the company, we’d like to award equity.” Morley responded
the same day “I am really enjoying my foray back into the exciting world of
entrepreneurship and would like to at least keep a part-time home here ;-).”
On July 21, Dorsey and Morley met in person in San Francisco, and Dorsey offered
Morley a 1% equity stake in exchange for assignment of the patent application and a 0.25%
equity stake for “serving on the technical advisory board.” Morley said he would think
about it. On July 29, Morley emailed his friend Baebler that he was considering licensing
his intellectual property rights to another company, MagTek, and was leaning against
offering any exclusive license, including to Dorsey.
Morley accepted the 1.25% equity offer with some modifications in August. But
when Square’s lawyers sent the paperwork on September 14, 2009, Morley objected to the
four-year vesting period present in the terms. He rescinded his acceptance of the offer on
October 1, 2009. On October 2, Dorsey emailed Morley a new offer, “1% of the
company, fully vested shares. Or $100,000.” Morley accepted the fully vested 1%.
Around the same time, Morley and Baebler formed an LLC --- plaintiff REM Holdings 3,
LLC --- on October 5. Morley appointed Baebler as his agent in the equity/patent
assignment negotiations on October 6. Despite Morley’s earlier acceptance of a fully
vested 1%, Morley and Baebler ultimately demanded 1.32% of the company’s pre-funding
shares (they were worried that an upcoming funding round would dilute his share of the
company). Dorsey and McKelvey offered 1.25%, fully vested, but ultimately the 0.7%
gap was not bridged, and negotiations broke down.
C. Post-negotiation activities
Baebler sent letters to Square’s attorneys in late October asking that they cease and
desist using Morley’s intellectual property. Morley assigned his patent applications to
Square went on to acquire “intellectual property…related to magnetic stripes” from
others in December 2009 and January 2010. Notably, McKelvey reached out to Luis
Padilla Visdόmine, who in 2004 had published a description of a audio-in device that could
read credit cards. The record demonstrates that Morley himself had come across Padilla’s
blog post on the internet in August 2009, and attorney Chervitz advised in light of that blog
post (titled “Turning your mobile phone into a magnetic stripe reader”) that the concept of
a card reader for a cell phone is “probably not patentable.” Padilla licensed the idea to
Square for $1,000 in January 2010.
Meanwhile, Morley tried to license the technology to Square’s competitors. He
and Baebler worked on a document for dissemination to the media titled “Squaring Things
Up.” The documents stated that McKelvey and Dorsey were contemplating a mobile
payments startup and that Morley “went off on his own and using some components he had
on hand, assembled a working feasibility prototype, and about a week after the meeting
produced a recognizable waveform of a credit card magnetic stripe on his iPhone and
showed it to” Dorsey and McKelvey. The document went on to say that “Jack, Jim, and
the Square crew are proceeding on the challenging task of making a startup successful” and
In October 2010, for reasons not explained to the Court, Dorsey gifted to Morley equity in the form of a
stock transfer (30,517 shares) to Morley’s company REM. The Court is at a loss to understand the genesis and
ramifications of this transfer.
that “Square appears to continue to use the fruits of Bob’s thoughts and labor.” Morley
told others that he had “applied for patent and am seeking to license the technology.”
Media reports stated that “Morley planned to assign the patent to Square in exchange for
ownership shares in the company, but  the two sides couldn’t come to an agreement.”
D. Patent issues and lawsuits
On October 12, 2010, the Patent and Trademark Office (“PTO”) issued U.S. Patent
No. 7,810,729 (“the ‘729 Patent”), listing Morley as sole inventor and assigning the patent
to REM. On December 1, 2010, McKelvey and Square filed a complaint against REM,
seeking to correct inventorship of the ‘729 Patent. REM filed an answer and counterclaim
seeking declaratory judgment for patent inventorship and patent infringement. Attorney
Chervitz represented REM initially in those proceedings, but Square and McKelvey
successfully moved for Chervitz’s disqualification in light of Chervitz’s representation of
Morley and Square during the patent application process (for which McKelvey paid). In
June 2011, the PTO granted Square’s request for reexamination of the patents at issue in
the lawsuit. This Court stayed that matter pending the reexamination, and it remains
stayed today. The PTO and later the Patent Trial and Appeals Board (“PTAB”) rejected
all claims of the ‘729 patent on March 28, 2014, but following failed motions for
reconsideration, Morley filed a notice of appeal with the Federal Circuit on September 9,
Baebler and Morley sought to secure funding for the litigation beginning in 2011.
Numerous communications regarding fundraising have been produced. Defendants
contend that those communications support that Morley was not a co-founder, co-owner,
joint venturer, or partner of Square or the business that became Square. One February
2011 “prose summary” of the background behind the 2010 lawsuit stated that “Morley
assumed at some point a deal would be struck to trade his IP for equity in Square.”
Although plaintiffs agree that the cited communications do not use the specific language
used by defendants such as co-founder, co-owners, joint venturer, or partner, Morley
maintains that he considered himself in a joint venture with McKelvey and Dorsey.
On January 30, 2014, Morley and REM filed their own lawsuit, No. 4:14cv172. It
named Square, Dorsey, and McKelvey as defendants and alleged that Morley had agreed
with Dorsey and McKelvey to form a joint venture in February 2009, but that Morley had
been wrongfully cut out. The twelve counts included the following:
Count I – breach of joint venture agreement
Count II – breach of fiduciary duty
Count III – unjust enrichment
Count IV – patent infringement
Count V – constructive trust
Count VI – civil conspiracy
Count VII – negligent misrepresentation
Count VIII – fraud
Count IX – fraudulent nondisclosure
Count X – correction of inventorship
Count XI – conversion
Count XII – misappropriation of trade secrets
The patent-related claims --- Counts IV, X, and XI --- were stayed by this Court
pending reexamination, and the 2014 lawsuit was consolidated with the 2010 lawsuit,
which is still stayed pending resolution of the pending patent-related matters.
E. Trade secret allegations
After a long series of discovery responses and cross-motions to compel, plaintiffs
articulated the following trade secrets:
1. Dr. Morley’s headphone-jack card reader invention, which is defined in
the following patent claims:
a. All claims of the ’729 patent;
b. All claims of the ’394 patent;
c. Claims 1–6 and 14–20 of the ’248 patent;
d. All claims of the ’946 patent;
e. All claims of U.S. Patent Application 14/083, 315;
f. All claims of U.S. Patent Application 14/444,608;
2. Dr. Morley’s algorithm for decoding an audio signal from a headset-jack
card reader on a smart phone, comprising the steps:
a. Peak detection;
b. Determining 1s and 0s from the distance between peaks;
c. Start sentinel detection;
d. Error checking: parity and longitudinal redundancy check;
e. Framing of 5 bit characters in track 2;
f. Odd parity bit check;
g. End sentinel detection;
h. Determination of stable 0s duration in leading 0s;
i. Low pass filtering to reduce noise;
j. Inverse filtering to undo phase distortion of high pass filter.
3. The trade secret idea of partitioning the functions of a traditional magnetic
stripe card reader such that the decoding and subsequent (e.g.,
communications) functions are performed on a cell phone, and the electrical
components of the card reader device need only comprise a readhead, one or
more resistors, and a headphone-jack plug.
(#236-2 at 18-19; #260).
Defendants maintain that they have not used any of Morley’s alleged trade secrets in
E. The instant motion
Defendants have moved for summary judgment on all of plaintiffs’ claims (#296).
The matter has been extensively briefed. Nearly 400 exhibits have been filed. The Court
has thoroughly considered the record and the parties’ briefs, and the matter is now ripe for
Pursuant to Federal Rule of Civil Procedure 56(c), a district court may grant a
motion for summary judgment if all of the information before the court demonstrates that
“there is no genuine issue as to material fact and the moving party is entitled to judgment as
a matter of law.” Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 467
(1962). The burden is on the moving party. City of Mt. Pleasant, Iowa v. Assoc. Elec.
Co-op., Inc., 838 F.2d 268, 273 (8th Cir. 1988). After the moving party discharges this
burden, the nonmoving party must do more than show that there is some doubt as to the
facts. Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
Instead, the nonmoving party bears the burden of setting forth specific facts showing that
there is sufficient evidence in its favor to allow a jury to return a verdict for it. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 249 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 324
In ruling on a motion for summary judgment, the court must review the facts in a
light most favorable to the party opposing the motion and give that party the benefit of any
inferences that logically can be drawn from those facts. Buller v. Buechler, 706 F.2d 844,
846 (8th Cir. 1983). The court is required to resolve all conflicts of evidence in favor of
the nonmoving party. Robert Johnson Grain Co. v. Chem. Interchange Co., 541 F.2d 207,
210 (8th Cir. 1976).
Joint Venture Claim
Plaintiffs’ Count I is for Breach of Joint Venture Agreement. Plaintiffs allege that
Dorsey, McKelvey, and Morley “agreed to create and develop a mobile credit card
transaction business,” which “used Dr. Morley’s inventions, specifically the Square card
reader and the corresponding magnetic stripe decoding algorithms of the Square app.”
(#1 in Case No. 4:14cv172 (“Morley Complaint”) at ¶¶ 73-74.) Plaintiffs allege that
defendants Dorsey and McKelvey breached the agreement by refusing to recognize
Morley’s one-third ownership and control interests, incorporating a new company,
funneling all assets out of the joint venture and into that new company, and excluding
Morley from ownership in and control of that company. (Id. at ¶ 82.)
A joint venture is subject to the same legal principles as a partnership. See, e.g.,
48A C.J.S. Joint Ventures § 3 (“Indeed, the legal principles for determining the existence
of a joint venture have been said to be identical to those for determining a partnership, and
the two may be created in the same ways.”). In Missouri, partnership is statutorily defined
as “an association of two or more persons to carry on as co-owners of a business for profit.”
§ 358.060.1 RSMo. “The partnership agreement may be written, expressed orally, or
implied from the acts and conduct of the parties.” In re Reuter, 686 F.3d 511, 517 (8th
Cir. 2012) (quoting Hillme v. Chastain, 75 S.W.3d 315, 317 (Mo. App. S.D. 2002)).
Notably, “when the essentials of such an agreement have been established, expressly or by
implication, it is not to be avoided because of uncertainty or indefiniteness as to minor
details and, in the absence of express agreement, it will be presumed that profits are to be
shared equally.” Grissum v. Reesman, 505 S.W.2d 81, 86 (Mo. 1974).
Defendants contend that Morley’s joint venture claim is untenable and that they
should be granted summary judgment on it because plaintiffs cannot possibly overcome
the steep standard of proof required to establish such a claim. In that regard, the parties
hotly contest the burden of proof to establish a joint venture, with plaintiffs arguing for a
preponderance of the evidence standard and defendants a clear and convincing evidence
standard. To be sure, Missouri law on the issue is confusing. Most recent cases --- all
from the Missouri Court of Appeals --- apply the clear and convincing standard. See, e.g.,
Clark v. Francis, 422 S.W.3d 369, 378 (Mo. App. W.D. 2013); Winslow v. Nolan, 319
S.W.3d 497, 501 (Mo. App. E.D. 2010); Price v. Vattes, 161 S.W.3d 397, 400 (Mo. App.
S.D. 2005); H2O’C v. Brazos, 114 S.W3d 397, 402 (Mo. App. W.D. 2003); Nesler v. Reed,
703 S.W.2d 520, 523 (Mo. App. E.D. 1985). See also the Eighth Circuit’s use of the clear
and convincing standard in In re Reuter, 686 F.3d at 517 (citing Hillme, 75 S.W.3d at 317
without analysis). A few cases also confoundingly state that the agreement must be
“proved by cogent, clear and convincing evidence, or at least by a preponderance of the
credible evidence.” See, e.g., Morrison v. Labor & Indus. Relations Comm’n, 23 S.W.3d
902, 909 (Mo. App. W.D. 2000); Shea v. Helling, 826 S.W.2d 419, 421 (Mo. App. E.D.
1992); Brotherton v. Kissinger, 550 S.W.2d 904, 907 (Mo. App. S.D. 1977). The last
pronouncement by the Supreme Court of Missouri, however, in Grissum, 505 S.W.2d 81,
noted that the burden is a preponderance of the evidence unless the joint venture at issue
involves “an oral contract to convey real estate or the establishment of a resulting trust in
real property,” in which case the higher clear and convincing burden applies. Id. at 85-86.
The case relied on for this distinction, Brooks v. Brooks, 208 S.W.2d 279 (Mo. 1948), in
turn relied on 48 C.J.S., Joint Adventures, § 12, for the general rule that “[a] preponderance
of the evidence is necessary and sufficient to prove a joint adventure.” Id. at 284. The
clear and convincing standard, then, is simply the exception to the general rule for those
two particular categories of cases.8 Holdings to the contrary in the post-Grissum cases
simply overlook the distinction. Accordingly, the standard here is preponderance of the
The intent of the parties is the primary factor for determining whether a partnership
exists. Hillme, 75 S.W.3d at 317 (citing Binkley v. Palmer, 10 S.W.3d 166, 169 (Mo.
The current edition of Corpus Juris Secundum is consistent. 48A C.J.S. Joint Ventures
§ 10. Also, in a recent survey by the en banc California Supreme Court, it does indeed appear that
the preponderance of the evidence standard is used in a clear majority of jurisdictions. Weiner v.
Fleischman, 816 P.2d 892, 896-97 (Cal. 1991) (en banc).
App. E.D. 1999)). “The required intent necessary to find a partnership existed ‘is not the
intent to form a partnership, but the intent to enter a relationship which in law constitutes a
partnership.’” Id. (quoting Meyer v. Lofgren, 949 S.W.2d 80, 82 (Mo. App. W.D. 1997)).
The intent to form a partnership may be “implied from conduct and circumstances of the
party” and “the parties are not required to know all the legal implications of a partnership.”
Id. at 317-18 (citing Grissum, 505 S.W.2d at 86). The Court considers “all the conduct
and words of the parties” to determine whether they are sufficient to imply an agreement.
Downey v. McKee, 218 S.W.3d 492, 499 (Mo. App. W.D. 2007).
Plaintiffs insist there is ample evidence of the parties’ shared intent to carry on the
Square business as co-owners. They argue that a jury could reasonably infer that Morley,
Dorsey, and McKelvey mutually agreed to start a business as co-owners, as evidenced by
(1) the circumstances of Morley’s invitation to be part of the enterprise, (2) the
transformative nature of Morley’s card reader contribution, (3) the lack of a consulting
agreement in light of the fact that other “consultants” had such agreements, (4) Morley’s
other efforts in support of the enterprise, (5) verbal and written representations by the
parties and others, and (6) Dorsey’s and McKelvey’s final negotiations with Morley.
Defendants, on the other hand, argue that Morley did not share in the company’s
profits or risk of losses, had no voice in management or role in the direction of the
company, had no role in employment decisions, had no ability to enter into contracts for the
company, was not held out as a partner externally, accepted a mere 1% equity stake in the
company, and took other steps after negotiations broke down suggesting that even he never
saw himself as a partner.
Defendants downplay Morley’s role in the business by grouping him with a team of
other “consultants” they say were involved in Square’s early stages. Morley was
contacted by McKelvey around February 5, 2009, but another “team” member, Greg Kidd
was included in a dinner with Dorsey and McKelvey on February 10, 2009 to discuss the
business plan. The next day, an iOS engineer named Tristan O’Tierney had emailed
Dorsey and McKelvey the first build of the business’s software. Dorsey and McKelvey
formed an LLC named JDJM on February 13, 2009. McKelvey and Morley met in
Morley’s lab on February 16, 2009, and Morley built the prototype card reader device
using components in his lab on February 19, 2009. Sam Wen and Robert Anderson were
both brought on in February, and other contractors/consultants Randy Reddig, Cameron
Walters, and Ryan Gilter started in May 2009. None of those consultants/contractors
viewed himself as a founder --- rather, they were paid contracting fees, and they were
offered the chance to purchase equity later in 2009. However, plaintiffs note that the
contracting fees paid to those individuals stand in stark contrast to Morley --- the parties
agreed that he did not receive any contracting fees or reimbursements.
Defendants also focus on the fact that Morley bore no risk of loss that Missouri
courts expect to see in a partnership. Van Hoose v. Smith, 198 S.W.2d 23, 27 (Mo. 1940).
Morley says he risked losing the 100-160 hours he spent implementing and perfecting the
technology. Indeed, “[w]hen one party contributes the capital and the other the labor, skill
or experience for carrying on a joint enterprise, such a combination constitutes a
partnership unless something appears to indicate the absence of a joint ownership of the
business and profits.” Van Hoose, 198 S.W.2d at 27 (quoting State ex rel. Jones et al. v.
Daues, 13 S.W.2d 537, 539-40 (Mo. 1928)). Defendants argue that Morley cannot
seriously contend he bore the risk of losing that “sweat equity” inasmuch as he maintained
all along that he still held the intellectual property rights to the card reader and in fact
expected to trade it for equity in the company (or, later, to license it to someone else).
However, Morley maintains that the agreement was for him to transfer his intellectual
property to the partnership and that he later shopped his IP merely to mitigate his damages.
Furthermore, the Court notes that “there need not necessarily be an agreement to share
losses” in order to find an implied partnership. Beatty v. Garner, 458 S.W.2d 288, 291
(Mo. 1970); see also Bussinger v. Ginnever, 213 S.W.2d 230, 236 (Mo. App. 1948) (noting
that absence of agreement concerning losses is not dispositive); but see H2O’C, 114 S.W3d
at 403 (suggesting parties to a partnership must have agreed to share losses).
This case presents what appears to be a novelty in Missouri jurisprudence. As
noted in Van Hoose, 198 S.W.2d at 26, “perhaps no definition of the term partnership
could be framed that would be all comprehensive.” Most caselaw relied upon by
defendants involves employees of businesses who received salaries but were promised a
cut of the profits should the business be profitable. E.g., Clark, 422 S.W.3d at 375;
Winslow v. Nolan, 319 S.W.3d 497, 500 (Mo. App. E.D. 2010); H2O’C, 114 S.W3d at 403.
The Missouri courts there held that salaried employees who had contingent agreements to
share profits were not partners. Id.9 That is not the case here.
Morley acknowledges that he was not a member of JDJM, but he says that what he,
Dorsey, and McKelvey accomplished between February and October 2009 was a separate
joint venture that never took flight --- instead, Dorsey and McKelvey formed Square, took
his ideas and inventions, and refused to grant him fair equity in that company. It is clear to
this Court that McKelvey and Dorsey intended to work with Morley to build a business in
the mobile payments industry. Whether or not that intention rose to the level of a joint
venture or partnership appears to this Court to be a question for the jury.
Morley describes his early involvement as “transformative” because he changed the
direction of McKelvey and Dorsey’s thinking --- they were going to use the phone’s
camera to capture credit card numbers, but Morley conceived of a way for the phone to
read the card’s magnetic stripe. It appears undisputed that McKelvey and Dorsey ran with
that idea. McKelvey wrote that “just the Acorn itself” was a big deal, and Dorsey also
recognized that it was “huge,” observing that the ability to swipe a magnetic stripe card
was “crucial to the demos” with potential partners and investors. During equity
negotiations, McKelvey wrote to Morley that McKelvey “appreciate[ed] the awesome
In H2O’C, the court found it to be significant, too, that the parties shared gross revenues,
not profits. 114 S.W.3d at 404. That court held that the plaintiff was not in fact a partner
because, among other reasons, he was paid wages, filed an unemployment claim with the state
upon termination of his relationship with H2O’C, had no voice in management, and, though he
purchased a microscope for use in the business, H2O’C’s owner offered to pay rent for its use. Id.
idea.” Plaintiffs say this supports that Dorsey and McKelvey would have considered
Morley a co-owner. But defendants respond that this does not matter because Morley saw
the card reader as his invention, something to sell to Square, not something he created as a
part of Square. Plaintiffs disagree and point to Morley’s testimony that he created the card
reader for the joint venture. Plaintiffs ask how defendants could pursue an entire business
on that idea, in collaboration with Morley, and not believe such a pursuit and collaboration
was significant, probative evidence of whether or not the parties intended to carry on as
co-owners. This Court agrees. See, e.g., Beatty, 458 S.W.2d at 290-91 (holding
plaintiff’s proof of joint venture was sufficient where plaintiff’s involvement in the
business had been significant).10
Morley had not suggested a mere logo or a company name --- his idea and prototype
shaped the company itself. Although not dispositive, the facts that Morley was invited to
participate early and that his invention changed the company’s course are probative.
Further weakening defendants’ suggestion that Morley viewed the IP as his and his alone is
that defendant McKelvey paid for patent attorney Chervitz’s time and the fee for the patent
application. Morley was identified as the sole inventor, but, again, that is not dispositive.
See Hillme, 75 S.W.3d at 318 (noting that “[p]arternship property that is held only in an
individual name does not affect the partnership status.”).
In Beatty, the court noted that “Defendants would have plaintiff Clare Beatty lend his
efforts and knowledge of automobile service station sites and operations, take them to view many
sites which plaintiffs found were for sale, advise them in construction of service stations, aid them
in securing loans by pledging stocks, and aid in the clearing of titles, securing lessees for the
properties, and, in the end, have no interest in the properties purchased.” 458 S.W.2d at 291.
Furthermore, Morley offers evidence of his “control” during the early months of the
company’s development. He identified and supervised Wen, oversaw hardware
development before manufacturing of the Square device began, independently contacted
third parties on behalf of the company, and managed the patent attorney relationship.
Control over all aspects of the business is not a requirement for a partnership or joint
venture; exercising some degree of control over various aspects of the business is
“indicative of the requisite control necessary to find a joint venture.” Firestone v.
VanHolt, 186 S.W.3d 319, 326 (Mo. App. W.D. 2005); see also Queen v. Schultz, 747 F.3d
879, 888 (D.C. Cir. 2014) (reversing summary judgment where plaintiff had developed
concept, marketed it, and arranged for production even though plaintiff ceded all control
over “content, hiring, and production,” because “a reasonable jury could accept
[plaintiff’s] argument that he nonetheless retained control over other aspects of the
partnership business.”). Morley’s involvement with the development of the card reader
itself --- the foundation of the business --- up through the manufacturing stage is enough to
refute defendants’ contention that Morley did not have enough “control” to support an
In addition, as stated above, Morley was different from other individuals who were
involved early because, unlike O’Tierney, Wen, and others, Morley received no
contracting fee. Morley suggested McKelvey hire Sam Wen to help with software
development, which Morley directed, and he would have also known that McKelvey was
paying Sam Wen for his time. Finally, Morley contends he was promised a “stock deal”
or otherwise promised equity in the company through McKelvey’s emails to him.
Defendants suggest that Morley’s ultimate willingness to accept a less-than-2%
equity stake in Square is evidence that even he never considered himself an equal partner in
the business. Plaintiffs do not explain this apparent conflict, and it surely supports
defendants’ position. In addition, the Court does not discount defendants’ suggestion that
if Morley truly believed himself to be an equal partner, he would have spoken up during the
drafting of the business prospectus and upon being informed of the company’s
incorporation. But Morley’s willingness to accept less than 2% equity does not defeat his
claim of joint venture; rather it is merely evidence of a lesser interest in the joint venture. §
358.180(1) RSMo (setting forth the rights and duties of partners “subject to any agreement
between them”); see also Grissum, 505 S.W.2d at 86. Defendants make a substantial
showing in setting forth their evidence that the parties did not intend to carry on as
co-owners of a business. However, the Court must review the facts in a light most
favorable to the plaintiffs and give that party the benefit of any inferences that logically can
be drawn from those facts. Buller, 706 F.2d at 846. The Court must look to at all the
conduct and words of the parties in the totality of the circumstances. Downey, 218
S.W.3d at 499. Plaintiffs have effectively rebutted defendants’ evidence with specific
facts, and a reasonable jury might return a verdict for plaintiffs. See Anderson, 477 U.S. at
249; Celotex, 477 U.S. at 324. Although defendants suggest that such a determination
will open the floodgates to partnership claims by every entry level startup employee,
defendants once again downplay the importance of Morley’s contribution and role within
the business. Considering the totality of the circumstances --- the parties’ preexisting
relationships, McKelvey’s invitation to “play” and earlier communications about
entrepreneurial activity with Morley,11 the transformative nature of Morley’s idea and his
work in bringing that idea to life, Morley’s continued role within the business and his work
to patent the card reader (paid for by McKelvey), the promise of a “stock deal,” just to
name a few --- there is at least a question of fact as to whether the parties intended to carry
on this business as co-owners. See § 358.060.1 RSMo. The Court must therefore deny
summary judgment to defendants.
Plaintiffs bring three “fraud-based” claims: negligent misrepresentation (Count
VII), fraud (Count VIII), and fraudulent non-disclosure (Count IX). Plaintiffs contend
that when the evidence is presented to the jury, the same facts that support Morley’s joint
venture claim could alternatively lead the jury to a slightly different conclusion: that is,
although defendants may not have intended to start a business as co-owners with Morley,
they did intend to defraud him in order to obtain, without compensation, his contributions.
Missouri Supreme Court rejected “clear, cogent, and convincing” standard of proof
for fraud in favor of a preponderance of the evidence standard. See Crawford v. Smith, 470
For example, McKelvey had in December 2008 approached Morley about working on
an open-source automobile.
S.W.2d 529, 532 (Mo. banc 1971). That same preponderance of the evidence standard
applies to plaintiffs’ negligent misrepresentation and fraud claims. See id.; Troknya v.
Cleveland Chiropractic Clinic, 280 F.3d 1200, 1208 (8th Cir. 2002) (applying Missouri
Representations and reliance
Each of the three fraud-based counts (Counts VII, VIII, and IX) include elements
requiring a representation on behalf of defendants and Morley’s reliance upon them. The
other elements of the fraud-based claims are not addressed by the parties and are presumed
sufficient for the purpose of summary judgment.
Plaintiffs allege that McKelvey made false representations to Morley that he “would
be a member of a joint venture to develop a business to process credit card transactions
using a mobile device.” (Cmplt. ¶ 141.) Defendants contend that the record is devoid of
any evidence of any such representation. They suggest that plaintiffs rely only on the
question “do you want to play?” and the emailed statement “you’re definitely in the
brain-trust with my new work” as representations, and that those statements are too vague
to satisfy the requirements of plaintiffs’ fraud-based claims. See, e.g., Chase Resorts, Inc.
v. Johns-Manville Corp., 476 F. Supp. 633, 639 (E.D. Mo. 1979), aff'd, 620 F.2d 203 (8th
Cir. 1980) (holding that a promise of “‘years of trouble free performance’ is so vague and
abstract that this Court would necessarily have to guess as to the precise nature of the
material fact allegedly misrepresented”).
Plaintiffs insist that those statements are just part of the broader context on which
their claims are based. “An assertion may also be inferred from conduct other than
words.” Restatement (Second) of Contracts § 159 (1981), cmt. a. Indeed, a “false
representation may be made by spoken words or meaningful affirmative conduct.” Blaine
v. J.E. Jones Const. Co., 841 S.W.2d 703, 705 (Mo. App. E.D. 1992) (citing Wion v. Carl I.
Brown & Co., 808 S.W.2d 950, 954-55 (Mo. App. W.D. 1991)).
A false impression made by words or deeds in order to mislead another and
gain an undue advantage over the other suffices. Bank of N. Am. v. Crandall,
87 Mo. 208, 212 (1885); Jones v. West Side Buick Auto Co., 93 S.W.2d at
1086. In such a case, a misrepresentation implied from the circumstances
may be equivalent to a misrepresentation positively expressed. Although to
be actionable the misrepresentation need not be in words, nevertheless it
must constitute an affirmation of fact and not merely of opinion.
Wion, 808 S.W.2d at 954-55. Plaintiffs thus contend that the totality of the circumstances
described above, if it does not constitute an implied joint venture, constitutes a false
representation that Dorsey and McKelvey intended to go into business with Morley with
Morley’s credit card reader invention. Viewed through plaintiffs’ lens, the question “do
you want to play” and statement regarding being part of McKelvey’s “brain trust” are just
part of the story. Added to that story are Morley’s “game-changing” idea, his creation of
the prototype, his work with McKelvey on the invention, his work on the software with
others on the team, the promise of stock, the fact that Morley was not compensated while
other early-involved individuals were paid as contractors, and all of the other evidence
relied upon by plaintiffs in their joint venture claim.
Even absent any affirmative misrepresentations, plaintiffs claim that defendants had
a duty to clarify Morley’s status within the company in light of Morley’s foundational
ideas and hours of effort. Indeed, “[c]oncealment of a material fact of a transaction which
a party has a duty to disclose constitutes fraud as much as though affirmative
representation is given.” Refrigeration Indus., Inc. v. Nemmers, 880 S.W.2d 912, 918
(Mo. App. W.D. 1994) (quoting Curtis v. Kays, 670 S.W.2d 887, 893 (Mo. App. W.D.
1984)). “A duty to disclose arises when the silent party possesses superior knowledge that
is not within the fair and reasonable reach of the other party.” Id. (internal quotation
omitted). But defendants contend that they had no duty to disclose anything to Morley
because they owed no fiduciary duty to him. Plaintiffs suggest that circumstances in
which the parties were long-time friends constitute the sort of “relationship of trust and
confidence” giving rise to a duty to disclose. (#317 at 47 (citing Restatement (Second) of
Torts § 551(2)(a) (1977)). Missouri courts, however, have rejected that argument. See
Constance v. B.B.C. Dev. Co., 25 S.W.3d 571, 581 (Mo. App. W.D. 2000). To establish a
“confidential” or “fiduciary” relationship giving rise to a duty to disclose, there must be a
subservient and a dominant party. Kratky v. Musil, 969 S.W.2d 371, 377 (Mo. App. W.D.
1998). No such situation appears to exist here. Still, where one party knows of facts
“that he knows to be necessary to prevent his partial or ambiguous statement of the facts
from being misleading,” a duty to disclose arises. Restatement (Second) of Torts §
551(2)(b). Plaintiffs say that a jury could conclude that the collective statements and
actions required clarification as to Morley’s actual role and compensation in the company.
This Court agrees.
Defendants also contend they are entitled to summary judgment on plaintiffs’ fraud
claims because Morley cannot show that he relied on the alleged representations.
Reliance is of course a necessary element of plaintiffs’ claims. See, e.g., Wion, 808
S.W.2d at 953 (citing Sofka v. Thal, 662 S.W.2d 502, 506 (Mo. banc 1983)). Defendants
point out that Morley equivocated when asked whether he wanted to “play,” responding
that it depended on what McKelvey had come up with, and, up until 2014, Morley never
said he was being unfairly treated or excluded. Morley made statements that he was not
“in the company” like the others, that he considered the card reader device to be his own
intellectual property, and that had his own “cards to play.”
However, plaintiffs counter, and the Court agrees, that those post hoc comments do
not conclusively demonstrate a lack of reliance. Morley says he relied on McKelvey’s
statements inviting him to a joint venture when he originally disclosed his card reader idea
and agreed to pursue it. He and McKelvey “met so that he could tell me what it was that
he and Mr. Dorsey had come up with, to see if I was interested in taking him up on his
invitation to join their joint venture.” As Morley describes it, telling McKelvey about the
card reader was his “RSVP” to the “invitation” to join the joint venture. Furthermore,
Morley worked many hours in reliance on McKelvey and Dorsey’s representations (which
continued as they involved him in the business and sought his expertise). Morley has
adequately demonstrated that a jury could find he relied on defendants’ representations,
and summary judgment is not warranted.
Defendants characterize plaintiffs’ claims for breach of fiduciary duty (Count II),
unjust enrichment (Count III), constructive trust (Count V), and civil conspiracy (Count
VI) as “derivative claims” because each of these claims is dependent on plaintiffs’ claim
for breach of joint venture agreement (Count I). Defendants contend that because
defendants are entitled to summary judgment on Count I, that they are entitled to summary
judgment on these counts as well. However, defendants’ motion for summary judgment is
denied as to Count I. Defendants provide no arguments justifying summary judgment
other than their plea that plaintiffs cannot show that Morley was in a joint venture or
partnership, and, as a result, their summary judgment arguments regarding the “derivative
claims” must also be denied.
Trade Secret Claims
Plaintiffs claim that the defendants misappropriated their trade secrets in Count XII.
To establish a violation of the Missouri Uniform Trade Secrets Act, §§ 417.450 RSMo, et
seq. (“MUTSA”), plaintiffs must demonstrate (1) the existence of a protectable trade
secret, (2) misappropriation of those trade secrets by defendants, and (3) damages. §
417.453(2) RSMo. See Secure Energy, Inc. v. Coal Synthetics, LLC, 708 F. Supp. 2d 923,
926-27 (E.D. Mo. 2010). Defendants argue they are entitled to summary judgment on
plaintiffs’ trade secret claims because they say plaintiffs cannot show misappropriation
occurred, nor can they show a protectable trade secret. Defendants also say they are
entitled to summary judgment regarding plaintiffs’ Trade Secret #2 because there is no
evidence defendants have ever used it.
To show that any of the alleged trade secrets were misappropriated, plaintiffs must
show that the misappropriation occurred through “improper means” or the breach of a duty
of confidentiality or secrecy. § 417.453(2). Defendants argue that plaintiffs’ claim rests
on their alternative fraud-related theories that, to the extent Morley was not part of a joint
venture, defendants misled him into thinking he was in order to misappropriate his trade
secrets. Defendants therefor incorporate their arguments for summary judgment on
plaintiffs’ fraud-related claims. Because the Court holds that defendants are not entitled
to summary judgment on the fraud-related claims, their arguments about plaintiffs’
misappropriation evidence also fail.
Protectable Trade Secrets
A “trade secret” is defined as
information…that: (a) Derives independent economic value, actual or
potential, from not being generally known to, and not being readily
ascertainable by proper means by other persons who can obtain economic
value from its disclosure or use; and (b) Is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy.
§ 417.453(4) RSMo. Defendants say that plaintiffs’ three identified “trade secrets” were
not protectable trade secrets.
Courts have used the following factors to determine whether information constitutes
a trade secret under MUTSA: (1) the extent to which the information is known outside of
the business; (2) the extent to which it is known by employees and others involved in the
business; (3) the extent of measures taken by the business to guard the secrecy of the
information; (4) the value of the information to the business and to its competitors; (5) the
amount of effort or money expended by the business in developing the information; (6) the
ease or difficulty with which the information could be properly acquired or duplicated by
others. Secure Energy, 708 F. Supp. 2d at 926-27 (quoting Cerner Corp. v. Visicu, Inc.,
667 F. Supp. 2d 1062, 1076–1077 (W.D. Mo. 2009)). “The existence of a trade secret is a
conclusion of law based on the applicable facts.” Lyn-Flex W., Inc. v. Dieckhaus, 24
S.W.3d 693, 698 (Mo. App. E.D. 1999).
Trade Secrets #1 and #3
Trade Secrets #1 and #3 pertain to the headphone-jack card reader device and the
“partitioning” concept, i.e., that the device simply reads the card and the smartphone does
the decoding and communication. Defendants maintain that these trade secrets were
known outside the business and that they are easily duplicated, that they were not kept
secret in any way, that they are of little value to Square, and that Morley’s time and effort
spent developing them was minimal. For example, defendants say Trade Secrets #1 and
#3 were described on the Internet in 2004 by a Spanish graduate student, Luis Padilla
Visdόmine (“Padilla”). Other sources on the Internet also published descriptions of
devices bearing some relationship to Morley’s invention. But there is at least a question
of fact as to whether Padilla and other publishers’ writings are enough to support that
Morley’s invention was known outside the business. Plaintiffs and their expert, Mark
Jones, argue that Padilla and others did not disclose the use of a headphone jack on a
cellular phone or the simplified circuitry of Morley’ card reader design. Competitors did
not have similar solutions available, and even defendants’ expert has not identified any
other products that interfaced with a mobile phone through the audio jack. Moreover,
plaintiffs point out that just because the device is now described on the Internet does not
mean that it was generally known --- the websites have not been shown to have been
available during the relevant time period, and it is not clear that Padilla’s website was
known to anyone within the payments industry. See, e.g., Surgidev Corp. v. Eye Tech.,
Inc., 828 F.2d 452, 456 (8th Cir. 1987) (affirming district court finding that trade secret
was not generally known by others in the subject industry). The Court also notes that
trade secret law does not require the type of novelty and nonobviousness required in patent
law. See AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corp., 663 F.3d 966, 972-73 (8th
Cir. 2011). As plaintiffs point out, a reasonable jury could find that defendants’ cited
websites and articles were hardly known at all, much less generally known. Certainly, the
record shows that the trade secrets were not known to McKelvey and Dorsey before
Morley told them, and that is a relevant consideration.12
It is worth noting that the language used in most trade secret cases reflects a situation
where an employee leaves a business and steals the business’s secrets. Here, Morley is claiming
that the business (through Dorsey and McKelvey) stole his secret.
There also appears to be a disputed issue of fact regarding the issue of secrecy.
Defendants say that Morley voiced no concerns about McKelvey disseminating technical
specifications during development, and they also note that Morley discussed and revealed
his trade secrets to his friends and family. Plaintiffs respond that Dorsey himself
expressed surprise at McKelvey’s lackadaisical approach to secrecy (and regardless,
McKelvey’s actions cannot be imputed to Morley), although the presence of
confidentiality legends and the fact that manufacturers are not incentivized to divulge
potential customer secrets mitigate against this evidence. Another employee testified that
the company was in “stealth mode.” As for Morley’s disclosures, he testified that any
disclosures were made with the expectation that the secret would be maintained. Other
employees had confidentiality agreements, and most of the discussions Morley had outside
the company occurred after Morley had learned the defendants had taken his idea and were
offering only a small amount of equity in return. Furthermore, “absolute secrecy is not
required by MUTSA.” Wyeth v. Nat. Biologics, Inc., 395 F.3d 897, 900 (8th Cir. 2005).
As plaintiffs suggest, a reasonable jury could find defendants misappropriated trade secrets
when they acquired the inventions by misrepresenting Morley’s co-ownership status or his
entitlement to fair equity compensation.
Next, defendants deny that the alleged “trade secrets” have any value because, for
example, Square’s competitors disparaged the “trade secrets” for the card reader’s simple
circuitry and lack of encryption. Defendants state that Square had to redesign its readers
so that they would perform decoding and encryption on the reader itself instead of on the
mobile device as Morley’s trade secrets dictate. Plaintiffs suggest that this industry
criticism confirms value because competitors had to scramble to come up with a way to
differentiate; as plaintiffs’ expert and others articulated, the headphone-jack card reader
invention was “disruptive” to the Card Payments Industry, and, critically, Square’s
redesigned card reader with encryption still practices Morley’s trade secret idea of using
the headset jack as the input.
Furthermore, plaintiffs provide ample evidence that his idea added value to the
business. Commentators called Square a game-changer, citing that the device plugged
into the headphone jack. Dorsey is on record stating that the “dongle” was the largest
contributor of value until November 2014. In addition, there is evidence that the card
reader was a major contributor to Square’s early financing efforts.
Finally, with respect to Factor 5 --- the amount of effort spent developing the trade
secret --- defendants state that Morley spent less than a day creating prototype from spare
parts. In fact, plaintiffs set forth evidence that substantial effort went into creating the
prototype, followed by months of research, testing, and fine-tuning. In sum, there is at
least a question of fact with regard to whether Trade Secrets #1 and #3 are indeed trade
Trade Secret #2
Trade Secret #2 is the algorithm for decoding the audio signal from the headset-jack
card reader on a smart phone. It includes the following steps:
a. Peak detection;
b. Determining 1s and 0s from the distance between peaks;
c. Start sentinel detection;
d. Error checking: parity and longitudinal redundancy check;
e. Framing of 5 bit characters in track 2;
f. Odd parity bit check;
g. End sentinel detection;
h. Determination of stable 0s duration in leading 0s;
i. Low pass filtering to reduce noise;
j. Inverse filtering to undo phase distortion of high pass filter.
As with Trade Secrets #1 and #3, defendants maintain that this “trade secret” was
not a secret at all. First, they argue that Morley himself admitted that the “decoding” did
not require any special algorithm, and rather that the algorithm comprises well known and
industry-standard techniques to decode a signal from a magnetic stripe. Plaintiffs point
out that the defendants had no knowledge of the decoding algorithm, however. In
addition, plaintiffs say defendants take Morley’s statements about industry-standard
techniques out of context, noting that the statements were in reference to a specific
argument by Square regarding noise in the card reader signal --- he clarifies that his
statement did not indicate that Morley’s algorithms were not unique and necessary for
other purposes unrelated to noise
Further, Morley instructed his former-student-turned-Square-employee Sam Wen
on how to write the code, and Square’s own engineer testified that it was “one of the
hardest problems I’ve come up against.” Plaintiffs also point out that the same engineer
stated that the solutions were not generally available: “There’s not a lot out there on it,
and it’s kind of unique the problem we’re solving.” Indeed, whereas card readers
predating Morley’s innovation had robust electronic circuitry, employing the algorithm in
an iPhone with minimal circuitry was a novel task. The unique features of the solution
included the peak detection process, the use of low-pass and inverse filters to compensate
for distortion in the card reader signal, and the manner of determining ones and zeros from
the peak detection. Defendants rely on evidence suggesting that only the inverse filtering
step was novel, but, even if true, “the fact that some or even most of the information was
publicly available is not dispositive of the first factor.” AvidAir Helicopter Supply, 663
F.3d at 972.
Yet more disputed issues abound regarding Trade Secret #2. Defendants further
argue that the “inverse filtering” step was invented by someone outside the company --one of Morley’s former graduate students --- but plaintiffs respond that Morley first
identified and proposed that step, and he simply had a colleague “crunch the numbers.”
In addition, plaintiffs point to emails confirming Morley’s guidance in addressing
peculiarities in implementing the algorithm in context, and Square’s own patent
application incorporates concepts reflective of Morley’s decoding methods. Further,
plaintiffs say the algorithm secret was essential because it enabled use of card reader trade
secret. As for the effort and time it took to develop Trade Secret #2, defendants note that
Wen, not Morley, did the programming. Plaintiffs, however, set forth evidence that
Morley spent additional time working on developing his own diagnostic programs for the
debugging and developing the software; furthermore, McKelvey even acknowledged that
“decoding the signal from Square’s audio device is complex, we have been working on the
algorithm full-time for over a year.”
Defendants also make a separate argument that they never even used plaintiffs’
alleged Trade Secret #2. They state that Square’s software lacks the “inverse filtering”
step and performs other steps in a different order. Plaintiffs observe, however, that the
statute only requires acquisition by improper means to show misappropriation.
§417.453(2)(a) RSMo. In addition, plaintiffs’ expert has determined that defendants
derived their decoding algorithms from Morley’s trade secret methods, and source code
shows that Square’s apps perform most of the steps of Morley’s algorithm and include
code borrowed from code Morley worked on in May 2009. Thus, plaintiffs’ expert opines
that the defendants used plaintiffs’ trade secret as a “shortcut” and are liable for
misappropriation. See Restatement (First) of Torts § 757 (1939) cmt. c (noting that “there
is no requirement that he use it in exactly the form in which he received it” and trade secret
user may still be liable “even if he uses [the secret] with modifications or improvements
upon it.”); see also Stuckes v. National Candy Co., 158 S.W.2d 342, 355 (Mo. App. 1911)
(holding that, if party used trade secret as “the basis for subsequent experiments,” it was
still liable “even if . . . defendant made some change . . . .”); Forest Labs, Inc. v. Pillsbury
Co., 452 F.2d 621 (7th Cir. 1971) (noting the user of a trade secret is liable “as long as the
substance of the process used by the actor is derived from the other’s secret.”).
* * *
In sum, defendants maintain that Morley’s inventions were essentially irrelevant to
Square’s success, not novel or unknown to the business world, and not valuable to the
company. Yet at the same time, Square brought suit against Morley in 2010 seeking to
add McKelvey as an “inventor” on Morley’s patents. Whether or not Morley’s inventions
were actually patentable, Square’s own litigation behavior belies its minimization of
Morley’s contributions. As with other trade secret litigations, “[t]he parties have provided
a great deal of evidence, but that evidence does not point all in one direction. Instead,
interpreting it requires many factual and credibility determinations.” Insituform Techs. v.
Reynolds, Inc., 4:05CV1116, 2007 WL 1198889, at *2 (E.D. Mo. Apr. 19, 2007), quoted
by Secure Energy, Inc. v. Coal Synthetics, LLC, 708 F. Supp. 2d 923, 927 (E.D. Mo. 2010).
Summary judgment is thus not appropriate on this record.
IT IS HEREBY ORDERED that defendants’ motion for summary judgment
(#296) is DENIED.
day of April, 2016.
STEPHEN N. LIMBAUGH, JR.
UNITED STATES DISTRICT JUDGE
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