IBM Takes On Amazon

Big Blue rarely files intellectual property lawsuits, but it's accusing the Web retailer of violating five of its patents

by Steve Hamm

In a legal case that could have broad implications for e-commerce and patent law, IBM sued Web retailer Amazon.com on Oct. 23, accusing the company of violating five patents that were filed in the late 1980s and early 1990s. IBM is seeking an injunction that would stop Amazon.com from using the patents, which Big Blue claims are at the heart of the retailer's online business.

The patents cover basic methods for conducting commerce online. These include storing data and presenting advertising in an interactive service; using hypertext links in connection with user goals and activities; and ordering items using an electronic catalogue. "These are fundamental patents," says John E. Kelly III, senior vice-president of IBM Technology and Intellectual Property. "If you're doing e-commerce in any way similar to what Amazon.com is doing, you're using this intellectual property."

A RARE LAWSUIT

IBM (IBM) divided the case in two, and filed the suits in judicial districts in eastern Texas that have historically been friendly to plaintiffs. Amazon.com (AMZN) declined to comment on the filing. "We haven't seen the lawsuits, so we're not in a position to comment," says spokesperson Patricia Smith.

IBM has the world's largest intellectual property portfolio, with 40,000 patents, and it records about $1 billion a year in income from patent licensing. IBM rarely files intellectual property suits—just two this decade. Kelly says a large number of companies already license the patents covered in this suit. He said every other company IBM has approached with these claims has either licensed the patents, has stopped using the methods, or is in negotiations with IBM.

IBM first approached Amazon.com in 2002, but was not able to convince the retailer to either license the patents or change the way it operates, according to Kelly. "We tried our best," he says. "But they showed no signs of doing what we thought was right—respecting our property. We decided they weren't interested in reaching an agreement."

EXAMINING THE LAW

The Amazon conflict was given the internal code name Scyphia, named after the land of the Amazons, the fierce warrior women, in Greek mythology. The patents were filed in 1988, 1990, and 1992, and most were granted in the mid-1990s. The advertising patent was granted this year.

Lawyers and intellectual property experts say this case could help clarify the law concerning Internet patents, some of which have been criticized for being overly broad. "It's helpful to get good cases for courts to decide on, and this could be one of them," says Ashish Aurora, a professor of economics at Carnegie Mellon University's H. John Heinz III School of Public Policy and Management.

Internet business-method patents have become controversial since 1998, when the U.S. Patent and Trademark Office began granting them frequently. In fact, one of the most famous business-method cases came when Amazon.com was granted a patent for "1-Click" shopping in 1999 and promptly sued rival Barnesandnoble.com (BKS).

STRADDLING THE LINE

IBM seems to have come down on both sides of this issue. In December, the company filed an amicus brief in the U.S. Supreme Court case of Laboratory Corp. of America Holdings v. Metabolite Laboratories, arguing that method patents have been overdone, and acknowledging that some of its own business-method patents may be invalid. "I will be looking to see if IBM has had a change of heart since last December," says attorney James W. Dabney, partner at Fried, Frank, Harris, Shriver & Jacobson LLP.

IBM's Kelly says the company makes a distinction between method patents that don't have much technology behind them, and those that include a considerable amount of technology. It says the patents at the heart of the Amazon case are in the second category. "None of these are pure business-method patents," Kelly says.

That may be so, but Dabney says one of the patents appears to be light on substance. He says four of the patents are fairly conventional, but the one about ordering items using an electronic catalogue "seems to be the weakest of them, at least technically."

IBM made its suits public right at the opening of the stock markets. In midday trading, Amazon.com's price was up 25 cents while IBM's was up $1.

Hamm is a BusinessWeek senior writer based in New York.

With Rob Hof in Silicon Valley