The Price of Google Wallet's Smartphone Payment Dreams

Last Updated May 27, 2011 11:32 AM EDT

As soon as Google (GOOG) announce an Android smartphone payment system, Google Wallet, the unprocessed fertilizer hit the fan. PayPal (EBAY) filed suit, alleging that Google and two executives -- Osama Bedier and Stephanie Tilenius, who left the payment firm for the search giant -- misappropriated trade secrets.

Partnered with MasterCard (MA), major payment processor First Data, and Sprint (S), Google has the start of a strong offering. But has happened so many times, allegations of impropriety and illegal conduct could slow the company's implementation and give competitors a chance to get ahead. What will it take for Google to finally learn and work smarter? A complete change in upper management, including new CEO Larry Page?

The litany of allegations that Google infringed intellectual property -- whether copyright, patent, or trade secrets -- goes back to at least 2002, when Overture sued Google for allegedly infringing one of its search patents. (Yahoo bought Overture in 2003 and eventually settled with Google for $328 million in stock.)

Since then, there have been plenty of suits. Just the number targeting Google or its partners for copyright or patent infringement because of Android could become the IP litigator's full employment act.

In fact, Google has developed a reputation for partnering with companies on projects and then using what it learned to directly compete with the now former partner. Also, the current PayPal action isn't the only time Google has faced accusations of trade secret theft.

The PayPal suit complaint alleges a similar scenario: the two companies were working on a smartphone payment project, and that Google surreptitiously worked to undermine PayPal in the process:

In addition, from 2008 to 2011, Google and PayPal were negotiating a commercial deal where PayPal would serve as a payment option for mobile app purchases on Google's Android Market. During that time, PayPal provided Google with an extensive education in mobile payments. Bedier was the senior PayPal executive accountable for leading negotiations with Google on Android during this period. At the very point when the companies were negotiating and finalizing the Android--PayPal deal, Bedier was interviewing for a job at Google -- without informing PayPal of this conflicting position. Bedier's conduct during this time amounted to a breach of his responsibilities as a PayPal executive.
PayPal further claims:
  • Bedier was "PayPal's senior leader charged with bringing its mobile payment and point of sale technologies and services to retailers" and knew that the company saw Google as a competitor.
  • Bedier took up-to-date copies of documents that outlined PayPal's strategies with him when he already planned to go to Google and that he disclosed trade secrets "within Google and to major retailers."
  • Google essentially "bought the most comprehensive and sophisticated critique of its own problems available."
  • PayPal had demanded return of the information but Bedier refused.
  • Tilenius was the one who recruited Bedier as soon as she had left PayPal, even though she supposedly had signed an agreement to not solicit employees for a year.
It's an ugly story that, if true, could cause Google a great deal of trouble, especially if PayPal gets the permanent injunction it seeks against Google making further use of any trade secret. That could translate into ending Google's online payment system, as currently conceived (although PayPal also seeks a royalty system, likely a fall-back position).

What makes this a management issue at Google is not some let's-all-sing-Kumbaya vision of corporate ethics. You'd have to be naïve to believe that many companies, or their investors, put that much emphasis on doing the right thing. But there comes a time when proper behavior is also smart.

Whether this project, allegedly scanning books into e-books without legal permission from copyright owners, or allegedly running afoul of many patents with Android, Google has managed to bake high risk into many of its strategic endeavors.

One constant in product strategy is upper management, including Page. Somehow, Google executives have presided over a company that has both failed to adequately diversify its revenue sources and effectively given competitors big legal sticks that might grind important ideas to a halt. In mobile payments, there are already a number of competitors to beware, including Square and Visa (V), to say nothing of PayPal itself.

So long as Google remains cavalier -- or downright dumb -- in its execution, it will find itself stymied time and again in its desire to ramp economic growth.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.