Google Wallet: Revealed today in New York, the app will allow a mobile phone to be swiped like a credit card. This signals the start of the age of 'MoLo'
PayPal allege that former executives Osama Bedier and Stephanie Tilenius defected and used trade secrets to help their new company create Google Wallet.
The lawsuit was filed just hours after Mr Bedier, who was hired just five months ago, launched the product in New York, where it will be tested this summer.
PayPal, which is owned by eBay, have not released such a system, which allows users to swipe their phone on a scanner and make an instant payment.
But they say they says it spent three years trying to secure a deal under which it would create an NFC system for Android, only for Google to end the talks by muscling in with a rival product.
The firm also claims in its lawsuit that Mr Bedier was in job talks with Google at the same time as he was leading negotiations to make PayPal a payment option on Google's Android software.
In its court filing, PayPal said: 'By hiring Bedier, with his trade secret knowledge of PayPal's plans and understanding of Google's weaknesses as viewed by the industry leader, Google bought the most comprehensive and sophisticated critique of its own problems available.'
'Google put Bedier in charge of its mobile payment business, virtually ensuring that Bedier would misappropriate PayPal's trade secrets concerning planning and competitive assessments in mobile payment.'
It also cited Miss Tilenius, who worked for Google between 2001 and 2009.
The technology that allows mobile phone users to pay with their handsets in shops is called near field communications, or NFC.
It is already used in Japan, and is predicted to become popular around the world.
Google, who have initially signed a deal with Mastercard, is to begin testing its scan-and-buy system in New York and San Francisco before rolling it out to the rest of the U.S. next year.
The Wallet app itself will require a PIN, as will each transaction.
The payment credentials will be encrypted and stored on a chip, called the secure element, inside the phone. The app itself will be free to users.
Although, for now, only owners of Sprint's co-branded Google Nexus S 4G, which already has the payment chip inside, will be able to use the service.
Google emphasised that the service would be open to all businesses and invited other banks, credit card issuers, payment networks, mobile carriers and merchants to work with it.
If the phone was stolen, the credit cards inside could be remotely disabled.
Consumers would have the same 'zero liability' for unauthorised transactions made with their phone as they would with their plastic cards.
The idea of mobile payments has excited firms such as smartphone designers, such as Apple and BlackBerry-makers Research In Motion, but worried credit card companies.
Until now, the cost of installing payment chips has kept carriers from signing on, as has haggling over how the transaction fees should be divided.
For now, Google has decided not to take a cut of these fees, which generate billions of dollars for the likes of Visa and American Express.
It is not known whether PayPal refused to waive fees, but it could be the reason they failed to beat Google to the chase.
Instead Google will rely on revenue generated by the increase in traffic to its websites, its new coupon initiative and the sale of more Android phones.
Promoting the service, Google wrote on its blog yesterday: 'You'll be able to store your credit cards, offers, loyalty cards and gift cards, but without the bulk.
'When you tap to pay, your phone will also automatically redeem offers and earn loyalty points for you.
'Someday, even things like boarding passes, tickets, ID and keys could be stored in Google Wallet.'
A growing number of mobile operators, banks, technology companies are now vying to gain a foothold in the U.S. mobile payments market.
Three of the top American carriers - AT&T, VerizonWireless and T-Mobile USA are also looking for bank and network partners to launch their Isis mobile payments venture.
Regarding the lawsuit, a Google spokesman said: 'We have not yet received a copy of the complaint and won't be able to comment until we've had a chance to review it.'
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