"First they ignore you. Then they laugh at you. Then they fight you. Then you win." Mohandas Gandhi delivered these powerful words in a speech during India's fight for independence from British colonial rule.

Red Hat's employees and visitors are reminded of it everyday. The phrase is written in bold above the reception area of the open source software provider's headquarters in Raleigh, North Carolina. Gandhi's words clearly resonate with the company, which has challenged conventional wisdom in the software industry since its launch in 1993.

All software is written with a source code, which is protectable by copyright law. Traditionally, this source code has been proprietary and a closely guarded secret of the companies that develop it. Then open source software came along. Open source (or free software) refers to any computer software whose source code is open to users and developers who can study it, revise it, or even improve or redistribute it. The copyright is owned by the creator but it is made available under a licence that allows free copying provided certain provisions on revision and distribution are followed. Open source software is an alternative to proprietary software.

For instance, Microsoft has a closed source model for most of its software: it enforces its rights against those who infringe copyright and (where it owns them) patents: the code is meant only for the creator's eyes. Red Hat however follows an open source model, allowing its software to be examined, modified and developed without any rights being infringed.

Collaboration is fundamental to the open source movement. This is unsurprising given that its origins can be traced to academics, who traditionally build on each other's work as part of the research process. For centuries, academics, researchers and scientists have been collaborating and publishing their works to allow those interested to put their findings to use.

The most significant open source project is the GNU Project, which was initiated by Richard Stallman, the so-called father of the free software movement, in 1984. It was designed to create an operating system that would offer the benefits of UNIX (a computer operating system developed by AT&T employees in the 1960s and 1970s) but comprise enough new code so that it could not be tied, ownership-wise, to UNIX. Instead, it would use free software. Linus Torvalds, a software engineer, contributed a working kernel – the central component of the computer operating system – to the project in 1994. This resulted in what Stallman refers to as the GNU/Linux system, more commonly known in the software community as Linux. The system is subject to the General Public Licence (GPL), one of the earliest open source licences.

Linux is Red Hat's foundation. The company was started in 1993 as a Linux and open source software provider. Thirteen years later, in 2006, the company acquired JBOSS, the world's second largest open source software company. This allowed Red Hat to become a full-service infrastructure provider. Rather than sell its source code, Red Hat makes its money by selling services that support the code.

On the one hand Red Hat is a developer, aggregator and tester of software such as Linux. On the other hand, it coordinates several collaborative projects, including The Fedora Project, which it set up in 2003. This is a collection of open source community software projects that relate to Fedora Core, an open-source Linux-based operating system, and Fedora Extras, which is a set of additional open source software applications. Used by an international community, it is designed to foster new technology. The company says that a global steering committee at Red Hat decided that Red Hat Linux was suffering from too many compromises as a retail "product", and that staff should redirect their efforts at creating a community-based project. Rather than being run through product management as something that has to appear on retail shelves on a certain date, Fedora Core is designed to be released based on schedules, set by a steering committee, which will be open and accessible to the community, as well as influenced by the community. The idea is that other developers will build upon Red Hat's existing products and technology. In this way, innovation gets a guiding hand from the company.

Building a business model

On its website, Red Hat emphasizes that no one company can own open source software. But, more importantly, that this type of software represents the future: "Freedom means choice. Choice means power. That's why we believe open source is inevitable. It returns control to the customer. You can see the code, change it, learn from it." Red Hat is at the vanguard of the shift to this model.

Some observers agree that open source will shape the future of software development, pointing to the rapid pace of the movement's growth as evidence. Says Marc Pensabene, partner at Fitzpatrick, Cella, Harper & Scinto in New York: "It is likely that most people use open source software because it's found not only in application software, but is also embedded in many of the products we use. You see more companies jumping on that open source bandwagon. The benefits are clear. People can customize their software, through a collaborative measure, and there's no licensing fee. You're not at the whim of an 800 pound gorilla in terms of what they want to do." It boils down to this: open source software is attractive because the licence gives a degree of certainty that you can use the software with minimal restraint.

The word collaboration figures prominently. "It really is at the heart of what we do," says Mark Webbink, deputy general counsel at Red Hat. Open source, of course, is grounded in it. Given that Red Hat was based on this premise, Webbink says: "We knew how to collaborate from the beginning. What we needed to figure out was how to build a successful company on that". The answer: generating revenues on a subscription-based model. Red Hat believes it is the first to launch such a model. Despite not gaining revenue from licensing its code, Red Hat says it provides value to its customers through aggregating, integrating, testing and certifying its code, and through delivering and maintaining the technology for customers.

Prosecution or litigation?

The company's position at the forefront of the alternative to the mainstream software industry was one of the primary reasons why Adam Avrunin was attracted to the business. Avrunin, the company's chief patent counsel, joined Red Hat in November 2004. The fact that the business is subscription-based was also a pull factor: "I found it fascinating to learn how one can build a sustainable business model around open source software, where users can obtain the code which is itself free of charge. I was also excited to learn the details of open source licensing and how patent rights interact with the rights granted under such licences. Courts have still not addressed some of these issues," he says.

Patents, and the patent system, are becoming increasingly important to the business. Deputy general counsel Webbink explains that when Red Hat decided to create the position that Avrunin filled, management received a lot of resumes from patent prosecutors. In contrast, Avrunin was a patent litigator at law firm Finnegan Henderson. "We found that rather intriguing," says Webbink. His resume made the decision makers question: "Do we want a good patent prosecutor? Or do we want someone who can keep us out of trouble?"

20 years in dog years

It appears that Avrunin wants to be both. "He's been here for 20 years already in dog years," says Webbink. Avrunin has been busy, in other words. Before he arrived, Red Hat had around 30 patent applications pending at the USPTO. "At the end of last quarter, we have nine issued patents out of 175 applications," says Avrunin. Cryptography, digital rights management and security are big focus areas for Red Hat's patents.

A day in the life of Avrunin

Adam Avrunin joined Red Hat as chief patent counsel in November 2004. Here's how he spends a typical day: On a daily basis, Avrunin works on patent procurement to identify Red Hat inventions that suit the defensive nature of its portfolio. Outside counsel draft and prosecute all of the company's patent applications, which leaves time for Avrunin to review that work, provide his input and make prosecution decisions. The company would not comment on the outside counsel it uses, but according to USPTO records, patents owned by Red Hat have been prosecuted by Wilmer Cutler, Moore & Van Allen and Blakely Sokoloff. Avrunin also takes part in regular patent clearance activities, to ensure that the software Red Hat distributes is free of potential infringement claims. And he is responsible for managing any patent litigation and addressing any third-party patent claims. At the moment, the company is involved in one patent case – but discovery has not yet begun. The dispute is with a company called FireStar Software, which has asserted one of its patents against a programme Red Hat supports, called Hibernate. It relates to a technology known as object-relational mapping. Avrunin also helps the Open Invention Network identify patents worth acquiring and works on the Community Patent Review.

The chief patent counsel has been instrumental in Red Hat's involvement in the Community Patent Review (see box). This programme, a pilot system set to be launched this year by New York Law School (possibly with the backing of the USPTO), will encourage peer review for software patents. "The dispute is that examiners have a duty to issue software patents on technology that is new and non-obvious. This is not an easy task without the proper search tools. The result is that a lot of software patents get erroneously issued because they cover technologies that are not new and non-obvious," says Avrunin.

Avrunin was also a prime mover behind the Open Invention Network (OIN). Launched in 2005, this is an independent body set up to protect the Linux system. It does this by acquiring patents that might be useful in deterring rival companies from enforcing their patents against Linux. The OIN incorporated the Patent Commons, which outlines a no-patent enforcement policy. Its first manifestation came in 2001 when Red Hat created its Patent Promise. This was the first time the company stated its position on enforcement regarding software patents.

The OIN also creates a cross-licensing scheme that makes those patents available royalty-free to any entity that cross-licenses its Linux-related patents to those who have entered into an OIN agreement. The agreement extends to OIN members and their customers. These members include Red Hat, IBM, NEC, Novell, Philips and Sony. "Many industry players are interested in protecting the development of open source software because the Linux system is used more and more. They all have an interest in it," Webbink points out.

IBM, says Webbink, has embraced open source to an "amazing degree". The company, which owns more US patents than anyone else, has undertaken several collaborative initiatives. Last October it unveiled a global patent policy making 50% of its business method patents available for community review. IBM is also one of the co-creators of the OIN and sponsors the Community Patent Review.

"They have made a big statement by backing the Open Invention Network because it means they will not enforce their patents against Linux. Ten years ago, this would likely not have been the case," says Webbink.

This use of patents is a clear demonstration of the increasingly interdependent world that software developers inhabit.

Ronald Mann, a law professor at the University of Texas at Austin recently wrote an article provocatively titled "Commercializing Open Source Software: Do Property Rights Still Matter?" in which he talked about the "increasing complexity and interdependence of innovation of the industry". Companies have responded to this new environment by allowing each other access to their IP in a way unimaginable 10 or 15 years ago. Many are creating and selling products that infringe patents owned by their competitors, yet instead of turning to litigation, they are opting for cross-licensing deals to resolve potential disputes.

Open season for litigation

But that's not to say these agreements have solved the patent litigation problem. Companies are often persuaded to sign cross-licensing deals because the threat of litigation hangs heavily in the air. That threat leaves Red Hat vulnerable because open source can translate into "open season" at any time. This is because, by the very nature of their products, open source developers operate outside the traditional IP licensing structure. Few have an extensive enough portfolio of patents with which to defend themselves in the event of litigation. One of Red Hat's goals is to meet this challenge and reduce the litigation threat. "We are laying the groundwork," says Avrunin.

Red Hat's decision to get involved in the Community Patent Review is part of that groundwork. The whole aim of the project is to help develop a process in which applications for software patents will be scrutinized more thoroughly. As a result, its supporters hope that fewer invalid patents will slip through examiners' fingers. Avrunin says that this removes some of the burden on innovation, because fewer dubious patents mean that inventors will be at less risk of being accused of infringement. Webbink adds: "[The Community Patent Review] prevents patents from issuing because they are not new and non-obvious as the patent law requires." Essentially, it protects people from getting patents on things they shouldn't.

Red Hat's focus on reducing litigation risk leads us on to the subject of patent trolls.

From the Old South to open source

North Carolina conjures images of a genteel place; a remnant of the glorious Old South. Yet Red Hat presents itself as the epitome of modernity. Stylish, cubed – red, of course – chairs sit in a sleek waiting room whose walls are lined with modern art. There is a sense of radio waves streaming through the air above your head, or perhaps the open source codes themselves. The company launched in 1993. Since then it has opened offices across Africa, the Americas, Asia-Pacific and Europe, including in Australia, Brazil, Canada, China, France, Germany, India, South Africa, Sweden, the UK and the US. It now has more than 1,700 employees. In fiscal quarter three, the company reported revenues of more than $105 million, which is a 45% climb from revenue reported last year in the same period. As for the company's name, Bob Young, who co-founded the business, offers readers three alternative theories. The first is that red hats have been a symbol of liberty for centuries. During the French Revolution, for instance, revolutionaries wore red caps as they stormed the Bastille. The second is that Mark Ewing, another co-founder, owns a red baseball cap that his grandfather gave to him from his days playing lacrosse at New York's Cornell University. It resembled those hats worn by sporting teams at the turn of the 20th century. Ewing then began to name his software projects Red Hat I, Red Hat II, to differentiate his projects from those of his friends. So when he worked on Linux, he named it Red Hat Linux for lack of a better term. The third explanation is that Mark would wear his red cap at university at Pennsylvania's Carnegie Mellon. When students complained that they could not solve their computer glitches, his friends would refer them to Mark; the "guy in the red hat". As a result, "red hat" became synonymous with technical expertise relatively early. Claiming that the company wants to retain some mystery, Chris Grams, director of brand communications and design, says this is one piece of information it may never open source.

Perhaps Willie Sutton, aka Slick Willie, a notorious US bank robber from the 1920s and 1930s, put it best. Folklore says that when asked why he robbed banks, Sutton replied: "Because that's where the money is." Red Hat is aware that as its business expands, it will become a more attractive target for patent licensing companies seeking to cash in on corporate success.

Conversion through collaboration?

But patent trolls are not the only source of Red Hat's litigation concerns. They also come from industry competitors and collaborators. Confusingly, these are sometimes one and the same. For example, one of Red Hat's main competitors is Sun Microsystems, which sells computers, computer components, computer software and IT services. Yet, the two work together often. "JBOSS is highly dependent on Sun's JAVA system. We are very active in the JAVA community. Sun is open sourcing a number of elements of JAVA as well," says Webbink.

Red Hat also engages with Microsoft, another multinational computer technology company that is also one of its main competitors. Webbink says Red Hat worked with the Seattle company when Microsoft wanted to reassure the open source community that it would not sue for infringement on certain patents: "Microsoft began drafting a new approach, which led to the publication of its Open Specification Promise. We provided feedback to them throughout that drafting promise, and we found them to be highly receptive to that feedback." But Microsoft is not yet ready to abandon its proprietary model: the company has not given any indication that it is interested in joining the open source software movement, Webbink adds.

Microsoft has long been perceived to be the arch enemy of the open source software movement. In his article, law professor Ronald Mann writes: "One of the most prominent ideas [regarding the economics of open source] is that the model itself cannot be made profitable, but that firms invest in it solely because it decreases the monopoly power of Microsoft."

"Microsoft would like nothing better than to shut open source software down," says Eric Raymond, co-founder and president emeritus of the Open Software Initiative, a non-profit corporation dedicated to managing and promoting open source.

Adds Fitzpatrick Cella's Pensabene: "Companies who use the proprietary business model, I think, were hoping Linux would go away. But, the fact that it's lasted this long [at least 13 years] demonstrates it's a real competitive alternative."

Microsoft contends that it does "open its code" to the extent that it allows its customers, and the partners and competitors it collaborates with, access for viewing purposes. "Red Hat's structure allows users to view, modify or re-distribute it. We provide access to trusted third parties so they can, for example, improve their products. But we wouldn't allow anyone to modify or re-distribute Microsoft Windows under another name. I think the term 'open' is quite a loaded one in the software industry," says David Kaefer, general manager for IP and licensing at Microsoft.

But Microsoft is now working on a number of open source software projects, Kaefer says. "[As an example] we enter into partnerships with open source companies like Novell," he says. In November 2006 the two companies signed a six-year technical, marketing and IP agreement. According to Kaefer, it is the first agreement to create a hybrid open source/proprietary model for patent collaboration. Microsoft is providing access to its patents – in exchange for payment from Novell deriving from its consumer sales of Linux. Webbink sees this, in part, as a covenant whereby Microsoft will not enforce its patents during the term of its agreement with Novell.

Kaefer says there is a definite trend towards the commercialization of open source software. This is demonstrated by the fact that the software industry's customer base is gravitating towards Linux. "Open source isn't our dominant model of creating software, but increasingly others are using it," he acknowledges.

Arsenal of missiles

The Open Software Initiative's Raymond says that Red Hat is building an "arsenal of missiles" in its patent portfolio. "Red Hat, it seems, is looking for ways to legally game the system on behalf of open source. It looks like Red Hat wants to get to the point where if Microsoft sues for patent infringement on something within open source software, Red Hat could in turn cite violations within Microsoft Windows," he says. Of course Red Hat's newly found enthusiasm for patenting could also be to demonstrate to others what it owns before giving it up for free.

Microsoft's Kaefer says that Red Hat's decision to build a patent portfolio is normal in today's IP environment, but that what is key is the way that the company chooses to use that portfolio. What he means is that some companies choose to litigate their patents to boost licensing income. "For us, we license our patents for a fee or license them for free, depending on the technology," says Kaefer.

On the defensive

While not acknowledging that its decision to bolster its patent portfolio is designed to fend off Microsoft specifically, Red Hat says that it is adopting a defensive position. "The purpose of having a patent portfolio is so that we can defend open source software. We don't enforce or intend to enforce our patents offensively. But we will use our patents to counter-sue, if somebody uses their patents against us. At the same time, our Patent Promise [of no enforcement] reassures the community that we will not use our patents to impede innovation," says Avrunin.

This reference to building an "arsenal of missiles" harks back to the days of the Cold War. Only now the missiles and missile warheads are patents. The term "mutually assured destruction" is the concept behind defensive patent portfolios. In other words, "you sue me and I will counterclaim against you", says Webbink. "The best deterrent [against patent enforcement] is our ability to retaliate through our own nuclear arsenal," he explains.

He takes it further. "While we are focused on the world and how we want to see it, the build up of our patent portfolio is about survival. The threat [of litigation] is there and we had to think rationally of things we could do to build a defence. It was always the plan, but we knew it would take time."

Perseverance pays

When Red Hat began, it found itself battling an industry that largely ignored the open source platform. Yet today, many of its biggest competitors have embraced its collaborative ideals as well as its technology.

Red Hat's journey has forever changed the software industry because increasing collaboration has proven to be an effective business model. Many observers now believe that collaboration is a key component of innovation in the software industry in the 21st century. But can collaboration also help fix a patent system which, particularly in the US, is facing backlogs and a crisis of confidence? Given the impressive list of companies lining up to take part in the pilot Community Patent Review programme, perhaps it can.

Open source software providers have figured out how to integrate open source into the mainstream software industry and add value to products – while making money at the same time. One of the big challenges providers such as Red Hat face, according to Microsoft's Kaefer, is how they can differentiate their products from those of their competitors, since traditional methods, such as seeking patent protection, are less common among open source companies. Red Hat says that it has decided to stake its survival on building a defensive patent portfolio to defend itself against litigious aggressors. Taking its inspiration from the Gandhi quote in the company's lobby, Red Hat says it wants to fight its battles without aggression – and win.