Instant non-starter, right?

Don’t be so quick to pre-judge. The lawyer handling the case, Tom Melsheimer, previously won a $41 million judgement from a contact lens manufacturer for the very same plaintif who is bringing this suit, and he sounds confident.

“I wouldn’t have filed the case if we didn’t feel very confident in our position,” Melsheimer told me this morning as he was stepping off an airplane in Dallas. “This was a case that I liked, our firm liked, and I think we have a reasonable chance of winning.”

Melsheimer won’t say how much he hopes to charge Facebook for the patent, only that that he and Rembrandt Social Media LP, which owns the patents in question, are aiming “for a reasonable royalty.” Of course, even at a penny – or a fraction of a cent – per “like,” the billions and billions of likes that now permeate the web could quickly add up to a very big number with a lot of zeroes behind it.

One of the patents is a “method and apparatus” of created a web page diary with “multimedia references to contents of websites.” The other is a “system and method” of creative universal addresses for digital data.

Both were originally filed by a now-deceased Dutch programmer over a decade ago, ”Jos” van der Meer, who attempted to build Surfbook.com (now defunct). Apparently, Surfbook was intended to be a sort of social diary, not terribly dissimilar to Facebook — or any other social networking site.

Put them together and there’s no doubt that the two patents do describe, at least in some general way, processes of adding digital content from sites around the web to a personal profile page. The question, however, is whether that general description means that Facebook’s specific implementation of its wall, status updates, and timeline criminally infringe on the patents.

The patents are now held by that infamous type of company, a non-practicing entity, otherwise known as patent troll. Rembrandt Social Media LP, which is the specific company in this case, has previously claimed ownership of critical technologies in the digital TV and cable modems, in both cases buying patents and then ignoring agreements which were made to license those patents cheaply and easily.

“Rembrandt is a company that seeks out inventors with compelling story to tell about technology that has become core technology in a significant industry,” Melsheimer told me when I asked if the company was a typical patent troll. “It’s not an outfit that scoops up patents at a garage sale or something like that.”

The attorney firm handling the lawsuit for Rembrandt, Fish & Richardson, was founded in 1878 and has been named the “top patent litigation firm in the country” for each of the past nine years.

In other words, while this seems like a typical frivolous patent troll lawsuit, it’s probably a little more serious than the Paul Ceglia I-own-half-of-Facebook nonsense.

photo credit: iluvcocacola via photopin cc

Ray Felts is North American president of crowdsource patent-research company Article One Partners; David DiGiammarino is a director with the company.

You’re a venture capitalist. You just invested in a promising startup, e-Widgets. The future looks bright. Suddenly, out of nowhere, e-Widgets gets a certified letter in the mail. The letter claims that the company’s flagship software is infringing on an existing patent. Instead of focusing on innovation that e-Widgets can bring to market, the company suddenly gets sidetracked into a legal battle that could ultimately destroy its business.

This is not an uncommon scenario.

Patent trolls, a common term for non-practicing entities (NPEs), are shell companies that do not design, manufacture or distribute products. Rather, their sole purpose is to acquire and license patents to unsuspecting businesses. Last year, NPE litigation cost tech companies $29 billion, up more than 400 percent from 2005.

The “Small Change” Hold-Up Strategy

The majority of NPE litigation consists of “nuisance suits” that target smaller companies for hundreds of thousands of dollars. NPEs take advantage of the fact that most venture-backed companies don’t have the resources of big corporate players, which often include a first-class legal team.

As a result, the venture-backed company is subject to something of an old-fashioned hold up.  Here’s how it works. The patent troll threatens to sue for significant royalties. The financial threat, business distraction and cost of defending the company disposes the startup to a lower settlement. Faced with possible ruin, the venture-backed company agrees to a tidy settlement of $20,000. If they instead choose to engage in a legal battle, the settlement threshold goes up, forcing them back to the initially intended amount. In the end, the startup takes the path of least resistance, and the NPE makes it up on volume.

This is how the patent trolls build their war chests to go after bigger fish. For example Lodsys, a well-known patent troll, has settled with about 150 iOS developers so far. Startups, meanwhile, are frustrated that instead of spending $20K to grow their business, they have to pay off a patent troll.

New Developments to Help Small Businesses

Rather than cooperating with the scheme, entrepreneurs can invest in solutions that derail patent trolls. When they do, they stop the “innovation tax” in its tracks. NPEs like the path of least resistance, so companies that earn a reputation as easy targets may be harvested repeatedly. On the other hand, companies that earn a reputation for shielding themselves against NPEs deter further attacks.

A small but growing body of resources is empowering smaller businesses to fend off NPEs. One such resource involves new ways of finding prior art, evidence that the patented idea existed prior to the patent application date. The process of finding prior art can take months (and lots of money) due to the amount and complexity of information available. The traditional solution to the prior art problem is to hire a specialist to do the search, but most VCs can’t afford the time or financial investment. New solutions can be found in crowdsourcing prior art research, tapping into multilingual experts whose collective experience and diversity of knowledge makes them efficient identifiers of prior art across languages and industries.

In addition, venture-backed companies can now access a number of resources dedicated to helping them defend themselves from litigation. The Electronic Frontier Foundation (EFF), for one, offers an excellent knowledge base and resources at EFF.org/patent. UC Berkeley has developed the Defensive Patent License (DPL), in which inventors share their intellectual property without worrying about being sued, and agreeing not to sue other members.

In the private sector, patent enforcement insurance is another tool that small businesses are increasingly considering in their fight against patent trolls.

When Will Venture-Backed Companies Stop Hiding?

Small businesses are the lifeblood of America’s economy. When innovators are forced to divert resources from productive to unproductive uses, their very existence is threatened and the implications are broad. It’s crucial for venture-backed companies to understand and prepare for the growing threat of NPEs.

photo credit: kevin dooley via photopin cc

Fight like hell, if you’re Build.com chief executive Chris Friedland, who’s more than a little peeved by the massive influx of patent claims he’s had to deal with.

“Frankly, the absurdness of some of this stuff is just ridiculous,” Friedland says. “Are you going to patent wiping your ass?”

Friedland started Build.com in the early 2000s. Selling it in 2007, he did the unusual thing and stayed on as CEO. Today it’s the second largest online retailer of home improvement products in the U.S., doing $350 million in annual business.

“Only Lowe’s is bigger than us,” Friedland told VentureBeat.

That made Build.com a tempting target for so-called “patent trolls,” companies that acquire patents for the purpose of licensing intellectual property (as opposed to creating and selling products in the marketplace).

“About two years ago we were approached by our first patent troll with big threats over our web server,” says Friedland. Build.com was using the popular open source software Apache to run its websites.

“That scared the parent company, and scared us.”

New to patents and patent legislation, the company felt it could be facing an existential threat. “It’s kind of scary,” Friedland told VentureBeat. “If someone has a patent that is so broad, they could shut down your business … your business could go to zero.”

Eager to put legal troubles behind them, and wanting to avoid distractions from their core business focus, the company paid an undisclosed amount in the high five figures.

Big mistake.

It was like spilling blood into shark-filled waters. Almost immediately, the company was swarmed with patent claims.

“All of a sudden out of the blue we’re battling five different suits … I think because of the success of this troll, our category got targeted,” Friedland says. “The trolls came in massive force, and the patents went from semi-reasonable to just crazy.”

One of the companies was Patent Group LLC, a Texas-based firm that has targeted multiple firms, including 9 separate claims against 140 different companies in a single week in 2011 … the week between the passage of the America Invents Act — a bill intended to limit patent trolls’ power — and the signing of the bill.

Suffice it to say, Friedland is not a fan, calling Patent Group “sons of bitches” and “fucking trolls.” (VentureBeat reached out to Patent Group for a comment but has not yet received a response.)

The “invention” that Patent Group attempted to assert against Build.com was patent number 6603490, the same one the company is attempting to sue TicketMaster for right now. In Friedland’s words: “basically anything that has rotating images on the internet.”

This time, Build.com decided to fight. They’re not the first company to fight back in recent months.

Just this month, HipMunk announced it is suing i2Z Technology LLC. i2Z attempted to collect for United States Patent No. 5,345,551, which deals with syncing and presenting data from multiple sources in application windows, and HipMunk chief executive Adam Goldstein said “we do believe in fighting against spurious intellectual property suits.”

NewEgg has also led multiple battles against spurious intellectual property lawsuits.

But it was new territory for Build.com.

When the company decided that the patent was so egregious it could not settle, it pressed the issue in court … and won. In fact, Build.com recently received not just a dismissal but a dismissal with prejudice, meaning that Patent Group LLC cannot appeal or re-try the case.

That victory, however, was just the beginning.

Four other patent holding companies were seeking payments from Build.com, including Select Retrieval LLC. Select Retrieval is an infamous troll that sued more than 100 companies in 2011 for patent number 6,128,617, a way of retrieving and displaying information from a database.

Some would say that getting data from a database and displaying it online is obvious. Friedland agrees, but he’s a little more graphic:

“Are you fucking kidding me?”

Build.com is not against legitimate patents, Friedland says, but not only did he feel this patent was obvious and ridiculous, the company’s tactics were “bullying, and we’re not going to accept bullying.”

Instead of going Lone Ranger this time, Build.com assembled a joint defense group with 14 other online retailers and is now working to invalidate the patent.

“If it was a real patent, we’d license it — we license patents now,” says Friedland.

But the cost is significant and is stifling innovation, so Build.com is no longer settling. And Friedland’s recommendation for anyone else caught in similar circumstances?

“Create a joint defense group and fight it together.”

If a recent Apple-Motorola lawsuit is an indication, companies may not have to spend good money on bad lawsuits for long. Federal appeals court judge Richard Posner recently threw out the suit, saying “It’s not clear that we really need patents in most industries.”

Until that opinion proliferates in the legal and political establishment, however, patent lawsuits — legitimate or otherwise — will continue to be a cost of doing business.

And company builders like Friedland will need to keep fighting.