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EASTERBROOK's "quick look" on the GPL and Wallace's claim

From: Alexander Terekhov
Subject: EASTERBROOK's "quick look" on the GPL and Wallace's claim
Date: Thu, 09 Nov 2006 19:03:58 +0100

In the
United States Court of Appeals
For the Seventh Circuit
No. 06-2454
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:05-cv-678 RLY-VSS—Richard L. Young, Judge.
Before EASTERBROOK, KANNE, and EVANS, Circuit Judges.
EASTERBROOK, Circuit Judge. Does the provision of
copyrighted software under the GNU General Public
License (“GPL”) violate the federal antitrust laws? Authors
who distribute their works under this license, devised by
the Free Software Foundation, Inc., authorize not only
copying but also the creation of derivative works—and the
license prohibits charging for the derivative work. People
may make and distribute derivative works if and only if
they come under the same license terms as the original
work. Thus the GPL propagates from user to user and
revision to revision: neither the original author, nor any
creator of a revised or improved version, may charge for the
software or allow any successor to charge. Copyright law,
usually the basis of limiting reproduction in order to collect
a fee, ensures that open-source software remains free: any
attempt to sell a derivative work will violate the copyright
laws, even if the improver has not accepted the GPL. The
Free Software Foundation calls the result “copyleft.”
One prominent example of free, open-source software
is the Linux operating system, a derivative of the Unix
operating system written by AT&T in the 1960s and now
available without cost. (Unix® is a trademark of The Open
Group, but the source code to many variants of AT&T’s
work is freely available.) Linux is one of many modern
derivatives of Unix—which is not itself under the GPL.
Thus Apple Computer, which uses the Berkeley Software
Distribution variant of Unix as the foundation for the Mac
OS X operating system, is entitled to charge for its software.
Linux, initially the work of Linus Torvalds, is maintained
by a large open-source community. International
Business Machines offers Linux with many of its servers, or
customers can install it themselves. IBM has contributed
code to the Linux project and furnishes this derivative work
to anyone else with an interest. Red Hat, Inc., sells media
(such as DVDs), manuals, and support for the installation
and maintenance of Linux. The GPL covers only the
software; people are free to charge for the physical media on
which it comes and for assistance in making it work. Paper
manuals, and the time of knowledgeable people who service
and support an installation, thus are the most expensive
part of using Linux.
Daniel Wallace would like to compete with Linux—either
by offering a derivative work or by writing an operating
system from scratch—but maintains that this is impossible
as long as Linux and its derivatives are available for
free. He contends that IBM, Red Hat, and Novell have
conspired among themselves and with others (including the
Free Software Foundation) to eliminate competition in the
operating system market by making Linux available at an
unbeatable price. Under the GPL, which passes from user
to improver to user, Linux and all software that incorporates
any of its source code will be free forever, and nothing
could be a more effective deterrent to competition, Wallace
maintains. The GPL is the conspiracy as Wallace sees
things; it is a joint undertaking among users and creators
of derivative works to undercut the price of any potential
rival. But the district judge dismissed the complaint, ruling
that Wallace does not suffer antitrust injury, see Brunswick
Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977),
because he is a would-be producer rather than a consumer.
Although antitrust law serves the interests of consumers
rather than producers, the Supreme Court has permitted
producers to initiate predatory-pricing litigation. See
Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.,
509 U.S. 209 (1993); Matsushita Electric Industrial Co. v.
Zenith Radio Corp., 475 U.S. 574 (1986). This does not
assist Williams, however, because his legal theory is
faulty substantively.
Predatory pricing is a three-stage process: Low prices,
followed by the exit of producers who can no longer make a
profit, followed by monopoly prices. 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. So the Court held in both Brooke Group and
Matsushita. See also, e.g., R.J. Reynolds Tobacco Co. v.
Cigarettes Cheaper!, 462 F.3d 690 (7th Cir. 2006); Schor v.
Abbott Laboratories, 457 F.3d 608 (7th Cir. 2006). Either
prices will stay low (reflecting efficient production and
enduring benefits to consumers) or the practice will be self-
deterring(because the predator loses more during the low-
price period than it gains later, and consumers are
net beneficiaries). When monopoly does not ensue, low
prices remain—and the goal of antitrust law is to use
rivalry to keep prices low for consumers’ benefit. Employing
antitrust law to drive prices up would turn the Sherman
Act on its head.
Wallace does not contend that software available for
free under the GPL will lead to monopoly prices in the
future. How could it, when the GPL keeps price low forever
and precludes the reduction of output that is essential
to monopoly? “[I]f a manufacturer cannot make itself
better off by injuring consumers through lower output and
higher prices, there is no role for antitrust law to play.”
Software that is not maintained and improved eventually
becomes obsolete, and the lack of reward may reduce
the resources devoted to maintenance and improvement
of Linux and other open-source projects. If that occurs,
however, then proprietary software will enter or gain
market share. People willingly pay for quality software even
when they can get free (but imperfect) substitutes. Open
Office is a free, open-source suite of word processor, spreadsheet
and presentation software, but the proprietary
Microsoft Office has many more users. Gimp is a
free, open-source image editor, but the proprietary Adobe
Photoshop enjoys the lion’s share of the market. Likewise
there is a flourishing market in legal treatises and other
materials, plus reference databases such as LEXIS and
Westlaw, even though courts give away their work (this
opinion, for example, is not covered by copyright and
may be downloaded from the court’s web site and copied
without charge). And so it is with operating systems. Many
more people use Microsoft Windows, Apple OS X, or Sun
Solaris than use Linux. IBM, which includes Linux with
servers, sells mainframes and supercomputers that run
proprietary operating systems. The number of proprietary
operating systems is growing, not shrinking, so competition
in this market continues quite apart from the fact that the
GPL ensures the future availability of Linux and other
Unix offshoots.
It does not help to characterize people who accept the
GPL as “conspirators.” Although the antitrust laws forbid
conspiracies “in restraint of trade,” 15 U.S.C. §1, §26, the
GPL does not restrain trade. It is a cooperative agreement
that facilitates production of new derivative works,
and agreements that yield new products that would not
arise through unilateral action are lawful. See, e.g., Broadcast
Music, Inc. v. Columbia Broadcasting System, Inc., 441
U.S. 1 (1979); Polk Bros., Inc. v. Forest City Enterprises,
Inc., 776 F.2d 185 (7th Cir. 1985). Cf. Texaco Inc. v. Dagher,
126 S. Ct. 1276 (2006).
Nor does it help to call the GPL “price fixing.” Although
it sets a price of zero, agreements to set maximum prices
usually assist consumers and therefore are evaluated under
the Rule of Reason. See State Oil Co. v. Khan, 522 U.S. 3
(1997). Intellectual property can be used without being used
up; the marginal cost of an additional user is zero (costs of
media and paper to one side), so once a piece of intellectual
property exists the efficient price of an extra copy is zero,
for that is where price equals marginal cost. Copyright and
patent laws give authors a right to charge more, so that
they can recover their fixed costs (and thus promote
innovation), but they do not require authors to charge more.
No more does antitrust law require higher prices. Linux
and other open-source projects have been able to cover their
fixed costs through donations of time; as long as that
remains true, it would reduce efficiency and consumers’
welfare to force the authors to levy a charge on each new
Wallace does not contend that Linux has such a large
market share, or poses such a threat to consumers’ welfare
in the long run, that evaluation under the Rule of Reason
could lead to condemnation. A “quick look” is all that’s
needed to reject Wallace’s claim. See, e.g., California Dental
Association v. FTC, 526 U.S. 756 (1999); National Collegiate
Athletic Ass’n v. University of Oklahoma, 468 U.S. 85
(1984); Ball Memorial Hospital, Inc. v. Mutual Hospital
Insurance, Inc., 784 F.2d 1325 (7th Cir. 1986) (unless a firm
with market power can increase its profits by curtailing
output, the practice is lawful under the Rule of Reason).
The GPL and open-source software have nothing to fear
from the antitrust laws.


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