Summary:

Companies have been scrambling to throw down billions of dollars to buy up patent portfolios. One expert warns the purchases reflect a market distortion while the impending Kodak sale suggests a bubble might be bursting.

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As a much-hyped auction of Kodak patents fails to draw expected interest, one intellectual property authority is warning that recent patent-mania in the tech sector could burst.

Neil Wilkof is a veteran intellectual property lawyer and has taught law in the U.S. and Israel. He describes recent eye-popping patent purchases, including those involving AOL and Nortel, as an “aberration.”

“It’s a sign of something gone awry, not a healthy market,” said Wilkof in a phone interview. “I think we’re in a patent bubble in a very specific industry. It’s a distorted market and misallocation of resources.”

Wilkof points to tech companies’ scramble to buy more and more patents in response to the lawsuits engulfing the smartphone and social media industry. These purchases have included Google’s $12.5 billion acquisition of Motorola Mobility and Facebook’s decision to blow $550 million of its cash on AOL patents.

Wilkof worries that these purchases don’t improve the companies’ ability to innovate or build a successful business – if the patents are so great, he notes, Kodak and Nortel would still be flourishing.

“The accumulation of patents [through these purchases] doesn’t lead to internal economic value,” said Wilkof, who is a booster of patents in general.

He also questions the industries that have built up around the patent industries. Wilkof says that a recent “patent valuation” conference in Singapore, participants admitted that valuing a patent portfolio was more art than science and – even though they have to tell their clients the opposite.

“You need to be the Wizard of Oz. You have to convince people there’s something behind the curtain and that only you know how to operate it.”

There are recent signs, however, that the patent bubble may be beginning to pop. The Wall Street Journal reported this week that initial bids for Kodak’s digital patent portfolio “came in far below the $2.6 billion the company said they could be worth.”

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