As Red Hat grows, it attracts more lawsuits from patent trolls and has to settle many of them, CEO says.
With Red Hat on the verge of becoming the first billion-dollar company focused exclusively on open source software, it has attracted quite a bit of attention -- from lawyers waving patents.
Red Hat doesn't need a legal team as big as Microsoft's, but it does spend a lot of time in court, particularly in the Eastern District of Texas, a hotbed of patent lawsuits filed by what Red Hat CEO Jim Whitehurst and others call "patent trolls."
Red Hat paid out $4.2 million in 2008 to settle a suit brought by FireStar Software, and more recently agreed to settlements with a so-called "non-practicing entity" -- a company that sues legitimate software vendors but doesn't produce any products of its own - called Acacia Research. Acacia bills itself as a "leader in patent licensing" and nearly all of its recent press releases focus on patent acquisitions and patent licensing agreements.
Despite some victories -- including one against that same Acacia last year -- Red Hat has elected to settle with what it deems patent trolls in various cases which it cannot disclose, according to Whitehurst.
"When it's so little money, at some point, bluntly, it's better to settle than fight these things out," Whitehurst said.
Red Hat fights when it believes bigger principles are at stake. Red Hat and Novell jointly won a case against an Acacia subsidiary in East Texas last year when a jury ruled that the companies did not infringe on user interface patents. Red Hat also filed an amicus brief on behalf of rival Microsoft in a patent dispute pending before the Supreme Court.
"When we feel like people are really abusing the patent regimen, and we have a good case that the patent is invalid, that it should never have been issued, it's not a patentable thing, or there's a lot of prior art, then we fight those out," Whitehurst said during an interview with Network World at this week's Red Hat Summit in Boston.
But when Red Hat doesn't fight, the public doesn't necessarily find out. "Some of them are [public] but we often seal them in settlement," Whitehurst said.
The CEO, who repeated Red Hat's view that software patents shouldn't even exist, said they impede innovation and that the court system is not properly equipped to handle patent disputes.
"Most of these are filed in the Eastern District of Texas, generally with a jury that has not completed college," Whitehurst said. "I have a degree in computer science, and these things are so far over my head, and it takes weeks of Ph.D.s to figure out exactly what this is, and then you're going to adjudicate it in front of a jury that really is not technically savvy. Do you think this patent is valid or not? It's both expensive and just a bizarre way to adjudicate it."
The majority of patent suits filed against Red Hat relate to middleware, Whitehurst said. Although Google is being forced -- by a jury in East Texas -- to pay $5 million for using Linux, Whitehurst said the Linux kernel itself usually isn't attacked because most principles of how an operating system works were spelled out before software patents were common.
Although independent users of Linux and free and open source software have special concerns about the patent system, Whitehurst said Red Hat is targeted by patent trolls because of its size and would still be a target even if its software were closed.
Just like a proprietary software company, one of Red Hat's main goals with settlements is to indemnify its customers against legal actions. Whitehurst said, "I don't think there should be software patents," because they prevent companies from pursuing legitimate business models if they think there's a chance they'll have to pay out patent licensing fees.
"Somebody says, 'I have a patent on voice recognition, so if you want to do anything around voice recognition, you've got to pay me,'" Whitehurst said hypothetically. "Any developers who want to do something say, 'Well, I don't know if this product is going to make sense [financially] or not. I'll just stay away from voice recognition.'"
In that vein, Apple co-founder Steve Wozniak recently told a story about how when he built the Apple II the company had to pay out $5 for every computer sold because of what he believed was a frivolous patent held by RCA, according to The Register.
"Some of them are just ridiculous," Whitehurst said. "It's not even [just] software. It's something on your website shows up this way. Well, didn't that show up on everybody's? Well, yeah, we're going to sue everybody. It's like, 'How much do you want?'"
Whitehurst said it's not so bad when two legitimate software companies sign cross-licensing deals, such as in 2004 when Sun and Microsoft came to terms. The real problems come from companies that don't even sell technology, he said.
"When you're dealing with another practicing entity, that's OK," Whitehurst said. "What's happening now is a new business model that's developed of a non-practicing entity, i.e. trolls, the law firms that buy these patents and they can't violate your patents because they're not selling anything. All they are is a law firm."
Despite the ongoing patent battles, things are looking up for Red Hat. The 3,700-person company has been posting double-digit revenue growth each year, even during the recession.
Oracle may be the largest vendor of open source products given its acquisition of Sun. But Red Hat is the most significant company built entirely around open source software, and widely seen as the standard-bearer for a market that is admittedly much smaller than the ones dominated by Microsoft and Apple.
"There's so few open source companies because most people don't deeply, deeply understand the model," Whitehurst said.
Whitehurst was the chief operating officer of Delta Air Lines before joining Red Hat in December 2007.
"Red Hat's culture is built around open source principles, openness and transparency," Whitehurst said. "I can tell people to do stuff and they just won't do it. 'Well, why, I don't agree with that. That's just stupid.' They all say that to my face. In the airline business, anything I would say, 'Yes sir!' It's very military. Personality-wise, I fit much better in the Red Hat culture and I don't mind people telling me I'm an idiot because often I am an idiot.
"We debate things out and we hash things out. It seems so painful when you go through the process. But when you get an agreement, stuff happens fast and it happens great because you've won their hearts."
Whitehurst said Red Hat will, for the first time, pass $1 billion in revenue in the fiscal year that will end Feb. 29, 2012. That would make Red Hat about one-sixteenth the size of Microsoft's Server and Tools division, but that's Red Hat's appeal: It makes less revenue per customer than its rivals.
Red Hat didn't shy away from self-congratulatory remarks during the keynote speeches at its annual Summit conference, regularly bashing Microsoft, VMware and Oracle.
When asked about Oracle's newly expanded position in the open source market, Whitehurst said, "They've been trying to compete in Linux for years and they've made very little progress. If they've made progress it's with customers we don't know about."
"We're just saying, it's not impossible for them to support RHEL, but they're going to have to do some real heavy lifting," explained Red Hat CTO Brian Stevens.
Oracle's control over Java and the Java Community Process is something that should be watched, but overall Whitehurst said Oracle is a threat to Red Hat but "not an open source threat."
When Red Hat reaches its first billion-dollar year, the company will hold a celebration -- but Whitehurst won't be buying a yacht to compete against Ellison in the America's Cup. The billionaire Oracle CEO famously won the prestigious sailing trophy last year.
Whitehurst has earned millions in salary and stock awards, but said, "Have you seen what we charge? I might have a dinghy out there. We don't have the price points to support [an America's Cup team]."