Are Patent-Holding Companies Holding Innovation Hostage?

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Prohibitively high royalty fees are just one way that patents threaten the marketplace. As seen in the lawsuits being filed by Apple (NASDAQ:AAPL), infringing on patents that cover software features or characteristics (rounded edges, aspects of the swipe function, etc.) that are widely used in an industry can force a company to stop selling a product, or pay massive settlements.

The standing logic is that patents are a necessary legal architecture to support and protect innovation, but the fallout from the patent wars and growing concerns of affected technology companies has ignited a debate that will reach United States antitrust authorities at the Justice Department and Federal Trade Commission.

Regulators will sit down for informal meetings with Cisco Systems (NASDAQ:CSCO), Nokia (NYSE:NOK), and Intellectual Ventures Management, a patent-holding company co-founded by former Microsoft CTO Nathan Myhrvold, to “understand the industry better,” according to FTC chairman Jon Leibowitz.

Complicating issues and helping to inspire the sit-down is a common practice among technology companies where they develop a technology, patent it, and then transfer that patent to a holding company that then sues its competitors. While the nature of patents themselves is hotly debated, the talks are likely to skim over the philosophical debate on intellectual property and try to find a pragmatic way of ending patent gamesmanship.

The Wall Street Journal reports that federal regulators will be investigating whether patent-holding companies that don’t make products but instead earn revenue through royalty fees help or hurt innovation. Often called “patent trolls,” holding companies are notorious for suing tech companies for infringing on the patents they hold. Seeking huge settlements, these companies have the ability to shut down operations as large as Research in Motion’s (NASDAQ:RIMM) BlackBerry service, which almost happened in 2006.

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