Amazon: This is Extortion …. And We’re Gleefully Paying It

Written by Evan Schuman
May 8th, 2007

Amazon fired off lovely rhetoric in December, but it surrendered in the conference room. As one lawyer put it, Amazon said in December “This is extortion” and in May, said “And we’re paying it.”

The issues and the symbolism couldn’t have been more the quintessential old versus new battle.

In one corner, we have 96-year-old IBM, master of the Patent for more decades than most companies have existed. In the other corner,, king of E-Commerce and one of the top leaders of the Web. (One could argue that Amazon and Google are co-masters of the Web universe today.)

IBM is no stranger to nasty fighting and is a company that sees something beautiful about a well-executed stealth patent. That’s where a company files a patent and sits on it?quietly?to see if anyone uses the approach and if that company happens to have any money. Think of it as a Patent Speedtrap.

But young scrappy Amazon is no shrinking HREF, either. In continuing to fight a lawsuit filed in October, Amazon let loose some powerful rhetoric in December, telling the world that IBM was up to no good, but to not worry. Amazon would stand up to this bully and make the Web world safe again.

“While IBM tries to cloak its rhetoric in the legitimacy of the patent laws, there is nothing legitimate about IBM?s purported claims,” Amazon said in a December filing. “IBM has accused of infringing three patents that were not even developed at IBM, but rather were bought from a now-defunct company for the apparent purpose of threatening other companies with litigation like this to extract licensing payments. IBM?s broad allegations of infringement amount to a claim that IBM invented the Internet. If IBM?s claims are believed, then not only must pay IBM, but everyone conducting electronic commerce over the World Wide Web–indeed, every website and potentially everyone who uses a Web browser to surf the Web?must pay IBM a toll for the right to do so.”

Will Amazon allow this to happen? No way. Well, at least not in December. “This theory of infringement is nonsense and will not allow IBM to use its patents improperly to tax the Internet and the millions of companies and individuals who use it every day,” it said in that same filing.

Fast forward to May 8. Amazon agrees to pay IBM “an undisclosed amount of money” and agree to “a long-term patent cross-licensing agreement.” Amazon’s Scott Hayden (Amazon’s VP of Intellectual Property) even had to say “IBM?s patent portfolio is the largest and strongest in the IT industry. Our license to its portfolio, and specifically to its Web technology patents, gives us greater freedom to innovate for our customers.? That’s news release speak for “Uncle!”

An IBM exec–Dan Cerutti, IBM?s General Manager of Software Intellectual Property?said in the statement, ?At IBM, we place a high value on our IP assets and believe this agreement substantiates the value of our portfolio.” Translation: Want another piece of me, book-seller boy? “We’re pleased this matter has been resolved through negotiation and licensing.” Putting this into historical context, the Nazis negotiated their way into Warsaw.

The last line of the IBM statement: “We look forward to a more productive relationship with Amazon in the future.” Translation: We’ve already measured them for dog-collars.

OK, so I’m being a little unsympathetic to Amazon, who probably doesn’t need to get picked on anymore this week. But if you’re going to go out and say that you won’t let this injustice continue as long as you’re sheriff, you should at least hold to your position for six months.

When I spoke with spokeswoman Patty Smith on Tuesday, she wouldn’t say what changed Amazon’s mind, but repeatedly referred to the short statement.

Mark Rasch, an attorney specializing in high-tech issues (and former U.S. Justice Department head of high-tech crime investigations), said there’s really no way to reconcile those positions. “What they said in December was ‘This is extortion.’ What they’re saying now is ‘And we’re paying.’ That’s the only way to harmonize those two statements.”

In all fairness, there are a lot of business issues behind this. Amazon counter-sued IBM, accusing Big Blue of violating some of Amazon’s patents. That was also dropped, but you’ll notice no statement about IBM paying Amazon.

There was a key change to the technology Patent landscape, courtesy of a rare unanimous U.S. Supreme Court decision on April 30 (KSR International Co. Vs. Teleflex Inc. Et Al). That decision raised the bar for patents that could be argued as “obvious,” typically ones that mildly build on existing inventions.

But far from helping the Amazon-IBM agreement, that decision actually would have been favorable to the Amazon side?which was arguing that many of the IBM patents in question were indeed obvious. Logically, that decision could have prolonged negotiations by giving Amazon a better defense.

One attorney involved in the case, however, said the Supreme Court decision didn’t have any true impact on the case, especially given how far along negotiations were by April 30. “The timing is such that I don’t know that the decision ended up having any impact,” the attorney said.

So what did likely impact the decision? IBM’s law firms are a mighty impressive army and it’s hard to argue that they don’t have the most experience in high-tech Patent issues of almost all kinds.

Amazon ultimately faced up to the sad realization that there was no way this was going to end well. It would have dragged on for years, costing oodles of money. In the end, Amazon might have won, but the money would likely have not covered the pain of the litigation. During that time, they’d not only be distracted, but every project using the challenged patents would have this dark cloud hanging over its head.

A quick settlement puts the matter behind them and allows them to not only use the IBM technology unimpeded, but there’s still the chance that IBM could use some of the Amazon creations and pay a few royalty dollars.

The troubling part of this, though, is that it was all so predictable. What exactly had Amazon executives expected? Did they think IBM would back off?

When they issued that language in December, had they intended to fight or was this always the end-target? Not sure what the rationale was, but the scenario that Amazon woefully underestimated IBM certainly seems the most plausible.


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