Patent Crowdbusting: Q&A with Cheryl Milone of Article One Partners

(MoneyWatch)  In 1998, patent attorney Cheryl Milone had an idea: create a business that would make money by debunking patents using the wisdom of crowds. Unfortunately for her, Jeff Bezos and Tim O'Reilly got there first with BountyQuest. Milone went to work for that company for a year, though it eventually closed down. (Perhaps trying to invalidate Amazon'sone-click patent didn't engender good will from Bezos.)

A few years and additional boutique patent law firm experience later, Milone thought the idea was still sound and possibly facing a more receptive environment. Raising money from private investors, she started Article One Partners, using a crowdsourcing and profit-sharing model to get people to search for prior art and a multi-leg approach to making the money to pay expenses and, ultimately, to share. I spoke with the now-president of Article One about the company and its first announced award of $50,000 for prior art related to the SP Technologies patent infringement suit against Garmin.

BNET: How did the BountyQuest model work -- or not? Cheryl Milone: BountyQuest relied on third party sponsors. It was way ahead of its time and it was hard to get third parties to sponsor studies.

BNET: How is your approach different? CM: We have two ways that we monetize the research that we receive from our studies.

BNET: So, if you think that a result is going to help or hurt a company's stock, you could place an equity trade accordingly? CM: Correct.

BNET: And because the information is all public -- otherwise it wouldn't constitute prior art -- you avoid any insider trading claims. What is the other method? CM: [The other] way is to license access to the collection by interested parties [in patent lawsuits].

Many crowd sourcing models monetize the use of the platform. They'll say to third parties, "Come and get the results you want." We'll be expanding into that model. We've had a number of Fortune 100 companies contact us, asking to sponsor studies on the site. The most likely candidate for third party companies would be ones involved in litigation. We would not then have a self-generated study on litigation. And the numbers provide ample capacity for [all] models. We have about 3,000 patent litigations filed annually in the US.

BNET: Could a sponsoring company bury the results? CM: The most likely third party would be an alleged infringer. There's an incentive for that sponsor to present the information in the litigation, whether publicly or privately. At the end of the day, it's nice to make your results public to everybody, but it's the same results if the results are shared between the two parties. The third party would own the collection for a specific period of time and then it would revert to Article One. We're developing this and it will depend on where the discussions come out. Our initial third party studies will likely have different terms than they will in the next few months.

BNET: Your materials mention advisers who do the research. Who are they? CM: Anyone with an interest [who is of age] can register. But anyone currently employed by the United States Patent and Trademark Office, or who has left [the office] in the last year, is welcome to join the community but cannot take part in the studies. The Patent Office has an exclusion clause in its employment contracts. It's somewhat grey, but we've interpreted it that way.

Our advisers have to complete an eligibility questionnaire to ensure that they are not employed by any of the interested parties in the litigations we're looking at. We also draw their attention to whether they are under any agreement with their employer to not participate in something like this. We want them to consider any obligations that they have.

BNET: How many advisers do you have? CM: We have about 1,300 signed up. We've had over 20,000 visitors [to the site]. What we find is that people register at the point they submit prior art, so I think the 20,000 figure is much more revealing.

BNET: How does the research process go? CM: We post a study. Advisers take a look. In an ideal situation, the advisor had knowledge of the technology in the study. That differentiates our approach. They'll ideally have a hunch. They then can check their eligibility through a questionnaire and then they do the research or open the file for relevant information, they go through a three step response and fill in the information. It's date and time stamped and begin to process it. There are two levels of processing. There's the initial processing where we do a very basic analysis. Is it relevant? Is it dated before the critical date for the patent? Is it new? For example, prior art listed on the face of a patent is something the industry already knows about. We review the results with our in-house staff, forming our own opinion. There are two full time [lawyers], and then at any given time we have three to six consultant patent attorneys. Then we verify it with an outside law firm. We launched with 20 [studies] and have completed 30 percent of them. We've since launched another nine studies.

BNET: How do you compensate the advisers? CM: We have two points of compensation. One is the flat monetary reward per winning study. It means in our opinion we do have prior art that invalidates the patent in the study. We've announced one [winning study] with a $50,000 reward [split between two people].

The other is a profit-sharing plan for about 5 percent of our net annual profit. Almost every activity, including registering, earns profit sharing profits. Participating in the form earns profit-sharing points. Referring friends also does. Another area of profit-sharing is public interest studies. If our advisors participate in those, they earn profit-sharing points. That is to encourage our advisors to participate in the studies.

BNET: How much did it take to get up and running? CM: It was several hundred thousand.

BNET: How long before you're profitable? CM: We estimate that we will be profitable in 2009.