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Did Dispute With Insurer Force Amazon To Settle With IBM?

Back in March, InformationWeek.com readers were the first to learn that Amazon had been sued by its own insurance provider as a result of IBM's patent claims against the Web retailer. On Tuesday, Amazon caved in to IBM's demand for payment before the case got to a jury. There could be a connection here.

Here's the background: IBM sued Amazon in October, alleging that Amazon built its Web retailing empire on the back of IBM patents covering a broad range of e-commerce tools and techniques.

In March, Amazon's insurer, Atlantic Mutual, took the unusual (unheard of?) step of suing Amazon in an effort to escape any obligation to reimburse the company should it lose the case brought by IBM.

"Atlantic contends it is not obligated under its policies to provide a defense or to provide any indemnity to Amazon for the claims being asserted against it by IBM," attorneys for the insurer said in papers filed in U.S. District Court for Eastern Texas -- the very same venue that until Monday was hearing IBM's lawsuit against Amazon.

Atlantic Mutual maintains that the insurance policies it sold to Amazon are limited to claims related to "advertising injury" and "personal injury." The insurer says the coverage for advertising injury extends to claims for copyright violation but not patent infringement.

Atlantic Mutual also contends that the actions for which Amazon.com was sued occurred prior to the date on which the policies took effect.

The bottom line: Amazon may have found itself having to go before a jury without a safety net. Since juries appear increasingly fond of multi-billion dollar damage awards, the company may have decided to simply fold its cards and settle with IBM for what it deemed a reasonable amount.

Oddly, and I mean really oddly, an Amazon spokeswoman told the Associated Press on Tuesday that the company had already factored in damages to be paid to IBM in its second quarter and full year guidance, and thus does not need to restate its financial estimates in light of the settlement.

Amazon issued that guidance on April 24th. So for how long exactly has Amazon known that it was going to settle with IBM?

Did Amazon pony up to IBM because it knew ultimately that it was, in fact, violating IBM's patents? Or did it simply not want to play legal Russian roulette before a jury given the possibility that its insurance for such things may be ruled null and void.

Amazon isn't talking, but it's a question worth asking--especially if you're an Amazon shareholder.

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