CRAFTING AN EFFECTIVE PATENT STRATEGY: HOW SQUARE BUILT ITS PATENT PORTFOLIO

In this blog series, we’re examining how successful startups have approached the patent process, and how those strategies dovetail with our discussions in earlier blog posts about crafting a smart patent strategy. 

Our previous posts in this blog series dealt with startups whose path to the “big milestone” — an initial public offering — was relatively smooth: Uber, FitBit, and Dropbox.

So this time, we’re changing things up. Square’s story is a little different, as its IPO was not the celebrated story of a startup’s successful exit.

During its IPO in 2015, Square priced its shares at $9/each, well below its private market valuation — which investors widely regarded as a disappointment, to put it mildly.

But since late 2016, things have turned around for the company. According to the Motley Fool, Square’s revenue has steadily grown and its profit margins have quickly expanded, all of which has positively impacted its share prices.

Undoubtedly a number of factors played into Square’s comeback. But for this blog post, we’ll examine how Square’s patent strategy specifically might have helped shape this turn of events.

WHAT IS SQUARE?

Square started out as a simple way for sole proprietors and small businesses to process credit card payments. The company was founded in 2009 by Jack Dorsey (of Twitter fame) and Jim McKelvey, and launched its first app and service in 2010.

Today, Square has diversified its product range. This is by no means an exhaustive list of Square’s many offerings, but the list includes:

• Hardware and software solutions for credit card payments
• Square Contactless and Chip Reader
• Square Stand
• Square Register
• Square Magstripe Reader
• Financial services
• Square Capital, a financing program
• Cash App, a person-to-person payments service
• Square Payroll
• Omnichannel services
• Caviar meal delivery service

AN OVERVIEW OF SQUARE’S PATENT PORTFOLIO

We ran a search in the USPTO patent database to find out how many issued U.S. patents Square has obtained each year, and our search results are plotted below:

Square: Issued patents per year

Our search did not include unpublished or pending patent applications.

Also, keep in mind that patents are typically issued about 2-3 years after they’re filed. With that in mind, the data tells us the following:

• Square filed very few patents in its early years. As shown in the plot above, they had very few issued patents from 2009 to 2012.
• Square began stepping up its patent filing activity in the years leading up to its IPO in 2015. This is seen from the massive increase in issued patents a couple of years later.

We observed a similar pattern in the data that we collected on FitBit’s patent portfolio in an earlier post.

WHAT TECHNOLOGY IS SQUARE PATENTING?

According to PatentVue, Square’s patented technology can be classified into the following four categories:

• Mobile (near-field and wireless payments)
• Electronic payments
• Consumer-facing financial data processing
• Enterprise-level data analytics related to finance

We took a closer look at a small cross-section of Square’s portfolio to better understand Square’s patenting priorities:

CORE PATENTS

Predictably, Square’s core patents revolve around hardware and software for credit card readers — the company’s original product offering.

Examples:

• U.S. patent number 8,231,055 is for “systems and methods for decoding card swipe signals.”
• U.S. patent number 9,424,721 covers a “point of sale system.”

FINANCIAL TECHNOLOGY

The Motley Fool identified several investment priorities for Square — one being financial services. Square’s patent portfolio reflects this priority, as it shows recent research and development around fintech.

For example, U.S. patent number 9,378,491 covers a “payment transfer by sending email.” Broadly, the technology enables its users to transmit payment from one mobile device to another via email. The process is relatively hassle-free, as users don’t have to create an account or log into a service to send payments.

CRYPTOCURRENCY

Square CEO Jack Dorsey is known to be a big proponent of cryptocurrency — in particular, bitcoin. So it shouldn’t come as a surprise that Square has started dipping its toes into cryptocurrency waters.

Multiple media outlets have reported on one of Square’s latest patents: U.S. patent 10,055,715, which describes a “cryptocurrency payment network.”

In a nutshell, the technology would allow Square to accept payment in any currency, including bitcoin or other cryptocurrencies. Payment would be automatically converted to local currency.

Currently, cryptocurrency transactions can be very slow. Square’s patent suggests that their invention can allow cryptocurrency transactions to be processed almost as quickly as a credit card transaction.

It’s not yet known if the system will be incorporated into mainstream Square products. Still, the patent shows Square’s interest in cryptocurrency.

SQUARE’S FUNDAMENTAL PATENTING MISTAKE — AND HOW YOU CAN AVOID IT

So how might Square’s patent strategy have affected the company’s market performance? In its early days, it appears that Square didn’t follow best practices for patent assignment in particular — which proved to be a costly mistake down the line.

THE PATENT IN QUESTION: CORE TECHNOLOGY

When Square was first founded, its original product was a small, square-shaped card reader (hence the company’s name) that could plug into a smart device’s audio jack.

The invention was covered by a patent (U.S. patent 7,810,729). If you look it up, you’ll notice the following:

• Inventor: Professor Robert E. Morley, Jr
• Assignee: REM Holdings 3, LLC

Critically, Morley is listed as the sole inventor, and the patent is assigned to a company other than Square.

THE RESULTING PATENT DISPUTE

After Square began to achieve more commercial success, Morley decided to assert his patent rights.

According to national media outlets, Morley and Square have been locked in a bitter patent dispute since 2014. Morley first sued the company’s co-founders for cutting him out of the company; Square then countersued Morley for leaving co-founder Jim McKelvey’s name off the patent.

Eventually, Square settled with Morley in 2016 for $50 million — a sum that, according to Forbes, made up more than half of the company’s losses that quarter.

TYING THE PATENT DISPUTE TO SQUARE’S IPO

To be sure, Square’s lackluster IPO in 2015 was caused by multiple factors.

For example, before its IPO, Square was known as a tech unicorn, which meant that it was valued at over $1 billion. But like many other tech unicorns, Square was running at a loss and was overvalued in the private market. So perhaps it’s not that surprising that Square’s IPO valuation fell far short of its valuation by private investors.

Still, Square’s missteps in handling IP rights likely also did further damage, especially considering that its settlement with Morley contributed so heavily to the company’s losses. It’s certainly worth noting that Square’s revenue started to pick up again in late 2016; the timing likely isn’t coincidental.

KEY TAKEAWAYS

So what lessons can tech startups learn from Square’s example?

1. Make sure you follow the right procedures to obtain written assignments (i.e., secure ownership of) your company’s patent rights.
2. Consult an experienced professional to help you with patent assignment: Cutting corners now could lead to increased costs down the line.

PARTNER WITH HENRY PATENT LAW FIRM FOR YOUR PATENT NEEDS

The team at Henry Patent Law Firm has extensive experience handling complex patent prosecution matters for emerging tech companies — including patent assignments and ownership agreements. Contact us now to find out how we can help.