But Millennium soon found out that COR’s patents were so weak as to be unenforceable in court, and bore little relation to Millennium’s underlying business. “It turns out that what they bought for $2 billion was nothing,” says David Martin. “[Millennium] looked online and got a patent count and said, oh yeah, COR really has patents, and therefore there must be value. Well, did they have enforceable patents? No. Did they have patents that tied to their product lines. No. Did they have patents? Yeah.”

Martin runs an intellectual property consulting firm, and teaches at the University of Virginia’s business school. For the past few years, he’s been sounding the horn about a potentially troubling development in the world of patents: the existence of a patent bubble. Martin argues that with the patent office issuing so many patents that might not stand up under challenge, firms such as Millennium (and the venture capital funds and individual investors who back them) may be badly overestimating the value of patent-holding companies. According to many observers, venture capitalists and other investors often see patents simply as “assets” like any other, failing to understand that many patents will ultimately prove worthless. “Venture capitalists need to be educated about what the value of a patent is,” says Dan Ravicher of the Public Patent Foundation.

Martin, Ravicher, and others believe patents are over-valued: Most are used simply to generate revenue through licensing fees, without ever being tested in court thanks to the high cost of litigation. When patent-holders do use their patents to litigate, they’re successful in court only around one-third of the time. So in a system that allowed the true value of patents to be properly determined in court, they’d be worth much less. Inventors who attract capital by showing off their patents are taking advantage of investors’ ignorance and misunderstanding.

The bubble could burst, Martin fears, if patent challenges became more frequent, waking up the investment community to the fact that many are worth little, and causing a sudden loss of confidence in patent-holding companies.

A public initiative to reduce the cost of health care could trigger such a scenario, Martin says. So could a foreign government trying to reduce American market-share. Martin notes that China, among other countries, is beginning to adopt a strategy of challenging key U.S. patents on behalf of Chinese generic drug manufacturers. The Chinese government recently filed a petition to reexamine the patent on Viagra, and is supporting an initiative to reexamine Lipitor, the largest revenue-generating prescription drug on the market. “How many of those does it take before the dam breaks?” he asks. “It becomes a knowledge warfare that no-one’s really fully modeled.” However it happens, Martin is convinced that the spread of technological expertise around the globe ensures that the bubble will burst sooner or later.

“There’s too many players on the world scene who have a vested interest in saying, ‘I don’t think the US is innovative as they think they are.We’re going to start testing those assumptionsby challenging their patents.’”

Martin and a few allies have been lone voices on this issue for a long time, but at least one other prominent economic analyst has also taken note: Alan Greenspan. The chairman of the Federal Reserve touched on these fears in a speech at Stanford University in February 2004 when he asked, “Are [patent] protections so vague that they produce uncertainties that raise risk premiums and the cost of capital?” He didn’t answer the question, but, as Martin puts it, “If Greenspan even sneezes about something, it means that it’s passed thru a hell of a lot of filters to be mentioned in one of his speeches If people don’t see that as a bit of a harbinger, they’re blind.”

To be sure, not everyone agrees that we’re inevitably headed for a patent bust. Adam Jaffe, a patent expert at Brandeis University, agrees that patents are overvalued. But he says, “If a handful of bogus patents were really invalidated, I don’t think it would undermine people’s confidence in American technology more generally, because I think people can distinguish between the bogus patents and the real inventions.” And Brian Kahin, an expert in technology and intellectual property at the University of Michigan, doubts that venture capitalists give as much credibility to patents as Martin claims.

But if Martin is right, the consequences could be disastrous. If investors lost confidence in the status of patents as reliable assets, it’s not just big patent-holding corporations that would take a hit. Using figures from the Standard &Poor, Martin calculates that intellectual property accounts for around $410 billion of market value. Around 50 percent of litigated patents are invalidated or altered by the courts, according to most measures. That means, says Martin, that “somewhere in the neighborhood of 7-10 percent of the total tradable market,”–around $200 billion–“doesn’t exist. Not ‘is overvalued.’ It doesn’t exist. So what you’re left with is a bubble that is preserved for maintaining a selective ignorance. And that selective ignorance is something that will come back ultimately and haunt the market in some remarkable ways.”

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