Antitrust - Does Giving Away Something For Nothing Violate the Antitrust Laws?: Wallace v. International Business Machines Corp., No. 06-2454 (7th Cir. Nov. 9, 2006)
The United States Court of Appeals for the Seventh Circuit, in Wallace v. International Business Machines Corp., No. 06-2454 (7th Cir. Nov. 9, 2006), affirmed a district court’s dismissal, ruling that an open source
software licensing system, the GNU General Public License (“GPL”), does not violate federal antitrust laws. In an opinion by Judge Easterbrook, the Seventh Circuit held that the GPL’s requirement that licensed
software be free did not constitute predatory pricing or price-fixing, and that the GPL did not constitute a conspiracy in restraint of trade.
The General Public License System and Linux
The GPL is an “open source” licensing system devised by the Free Software Foundation, Inc. Authors who distribute their works under this license authorize the copying of the work as well as the creation of derivative
works. The GPL prohibits charging for copies or for the derivative work, and people may make derivative works only if they come under the GPL as well. Under the GPL neither the original author nor anyone who creates an
updated or improved version of the work may charge for it or allow a successor to charge for it. Open-source software is licensed through the GPL in order to ensure that it remains free, as any attempt to charge for it or a
derivative work will violate the copyright. The GPL only applies to the software; however, people may charge for the physical media the software is provided on and for technical assistance with the software. See generally, Wallace,
No. 06-2454, at 1-2.
The most prominent example of open-source software is the Linux operating system. Linux is a variant of the Unix operating system. Unix is also the foundation for the Mac OS X operating system found on Apple computers.
Linux is licensed under the GPL and maintained and improved through a large volunteer open-source community. Linux is popular enough that several businesses are involved with supporting the operating system. IBM, for
example, offers Linux with many of its servers and has contributed software code to the Linux project. Red Hat, Inc. sells Linux how-to manuals and provided technical support.
The lawsuit
Daniel Wallace, the plaintiff, sued IBM, Red Hat, Inc., and Novell, Inc., claiming that the defendants conspired among themselves and with others, including the Free Software Foundation, to eliminate competition in the computer operating
system market by offering Linux for free under the GPL. Wallace argued that he wanted to compete with Linux, but alleged that this was impossible so long as the software was available for free. Wallace alleged (1) that
requiring that Linux be free is predatory pricing; (2) that the GPL itself is a conspiracy in restraint of trade; and (3) that the GPL is illegal price-fixing. The United States District Court for the Southern District of Indiana
dismissed the suit, finding that Wallace did not suffer an antitrust injury because he was a would-be producer rather than a consumer.
The Seventh Circuit Finds No Antitrust Violation
The Seventh Circuit affirmed the district court’s dismissal, but on different grounds. The court noted that the Supreme Court has allowed producers to bring predatory pricing litigation, but held that Wallace’s
legal theories did not hold up.
First, the court shot down Wallace’s predatory pricing claim, holding that the GPL does not pose predatory pricing concerns. The court explained that predatory pricing is a three-stage process: low prices, which in turn
drive producers out of the market who can no longer make a profit, followed by monopoly prices by the remaining producer or cartel. The court explained, “The law’s worry is the final period in which the survivor
(or cartel of survivors) recoups losses incurred during the low-price period. When exit does not occur, or recoupment is improbable even if some producers give up the market, there is no antitrust problem.” Id. at 3. Without the third stage of monopoly, prices remain low and consumers benefit. Because the GPL requires that Linux and its derivatives be free for eternity, the GPL could never pose a threat of later monopoly prices.
Second, the court held that the GPL is not an illegal conspiracy in restraint of trade, because the GPL does not restrain trade. Rather, the court held, the GPL through unilateral action encourages the production of derivative
works that would not otherwise be created. This, the court held, is lawful.
Third, the court held that the GPL is not illegal price-fixing. While the court recognized that the GPL fixes a price of zero, agreements to set maximum prices generally benefit consumers and are evaluated under the Rule of
Reason. The court reasoned that requiring a producer to charge for intellectual property would reduce efficiency and harm consumers, and thus antitrust laws do not require higher prices. According to the court, Wallace
did not allege that Linux has such a large market share or poses such a threat to consumers in the long run that it could lead to condemnation under the Rule of Reason. Thus, full Rule of Reason analysis was unnecessary, and
a “quick look” was all that was needed to affirm the dismissal of Wallace’s claim.
Conclusion
Given that open-source producers are often volunteers with few resources, this decision is important in that it helps protect the open-source system from the expense of litigation. Judge Easterbrook’s opinion is interesting
legally for its analysis of the logic behind predatory pricing claims. In general, the law disfavors predatory pricing claims, because (1) lower prices in the initial phase is usually a good thing (and difficult to distinguish
from the results of competition); and (2) often, the bad goal – having prices forced up after competitors are forced to leave – will not succeed. If there are no significant barriers to re-entry, for example,
new competitors could come back in the market to prevent prices from being forced up.
In this case, the plaintiff, Wallace, comes across as something of a killjoy. Having a perpetual agreement to offer free software sounds like an unassailable benefit for consumers; it is counter-intuitive to claim otherwise.
In the case of open-source software, this intuition may be correct.
It does not follow that agreements to offer goods for free should automatically be immune from antitrust scrutiny. Suppose that there exists a rival operating system – lets call it “Portholes.” Due
to patent positions, there were only a limited number of companies who are able to service Portholes; to instruct people on how to use it; or to sell software used on the system. If those who service, instruct about, or sell
software for Portholes could make up the “loss” on the free software, and the system were to work so as to prevent any competitor from offering an alternative, consumers in fact could be paying more for “free”
software than if they had purchased software at market prices. And if the “free” price tag actually discouraged others from investing time in creating competing operating systems, the “free” price
may result in poorer software to boot.
The late Milton Friedman expressed this concept with the phrase: “[t]here is no such thing as a free lunch.” For example, printer manufacturers often offer their printers at artificially low prices with the expectation
that purchasers of their printers will be forced to use expensive print cartridges tailored specially for the printer. Surely if every printer manufacturer agreed, into perpetuity, to charge $0 for their printers, it would
not be obvious that the agreement would survive antitrust scrutiny. The agreement eliminates the possibility that a competitor could offer a better deal for consumers by unbundling and charging reasonable prices for both the
printers and the ink.
Open-source software may well be different from printers. The success of Windows, OS/X, and other operating systems indicates that consumers are willing to pay for operating system software despite the availability of free
Linux. In addition, the participants in an open-source system are getting a different form of value for the “cost” of offering their software for nothing – the ability to obtain other software for nothing.
In essence, it is a kind of barter system. On the facts of this case, given the presence of Windows, the resolution of the case seems unremarkable. In another situation, however, the “right” result may not
be so clear.