How Do You Compete With Free?

Posted by:  Taylor Durbin


500px-NewTux.svgLinux is a free open source operating system that is controlled by the General Public Lease (“GPL”). This lease allows for the creation of derivative works stemming from the core coding of Linux as long as it remains free. The GPL allows people and companies to charge for installation and tech support as long as the software itself remains free. Companies such as Red Hat, have earned great profits from making their own versions of Linux which they offer for free and then charge for the installation and maintenance of the software.

In an opinion out of the Seventh Circuit, the Plaintiff a would be producer of a Linux derivative challenged this business model of Red Hat as a violation of the antitrust laws. Wallace claimed that the GPL was a conspiracy between Red Hat, IBM, Novell, and the authors of the GPL to illegally restrain competition. The court threw out his conspiracy claim for lack of standing and ruled against his predatory pricing claim, primarily on the grounds Linux will always remain free under the GPL so there is no chance of prices being raised to monopoly levels after competition is gone. The seventh circuit believes that, “The GPL and open-source software have nothing to fear from the antitrust laws.” I disagree with this statement for several reasons.

Ignoring standing, I believe the right Plaintiff with a talented antitrust lawyer could get a conspiracy claim to a jury. Section 1 of the Sherman Act states, “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” This law as written is clearly impossible to enforce as every contract between two businesses is going to restrain trade in some way. The courts have said there is no way Congress actually meant what they wrote and through the common law, has shaped the legal framework of conspiracy claims. The first thing a court is going to look to is whether the GPL provision preventing anyone from charging for a derivative work of Linux is a naked restraint or not. A restraint is naked when it has no plausible purpose other than to restrain trade. Red Hat and their co-defendants would likely be able to convince a court that the purpose of the restraint is to keep Linux free for purposes other than to restrain competition. In order for a Plaintiff to reach a jury they will need to find some evidence that tends to exclude the possibility of independent action. Through discovery the Plaintiffs may find that years ago, some sort of meeting of the minds occurred between these defendants where they conspired to keep Linux free in order to profit from the service side without much competition. The theory would be that they wanted to limit other companies coming into the market with a better Linux distribution that they charge for. By making sure it’s always free companies are not going to invest the R&D necessary to make a Linux distribution so much superior that people are willing to pay for it.

This conspiracy theory I have formulated is rather farfetched, I’m just proposing the possibility that through discovery a Plaintiff could find evidence that a conspiracy did take place to profit from this “free” software. I’m not convinced that just because they offer this product for free they should somehow be immune from the antitrust laws. After all Microsoft was found to have violated the antitrust laws for the way they bundled Internet Explorer, which was a free product. One of the theories of that case was that Microsoft was “tying” their monopoly in Windows to monopolize the web-browser market. One could also argue that these defendants have a monopoly in the server operating system market which they are attempting to use in order to monopolize the servicing of these servers. The point I believe I have made is there is a possibility of a conspiracy or attempted monopolization claim against Red Hat and their co-defendants. To come full circle, I do not believe Judge Eastburn was correct in saying these defendants have nothing to fear from the antitrust laws.

A Michigan Law Review Article, delves into this same problem and concludes that the GPL’s price fixing (of zero) should be evaluated under the rule of reason and held to not be in violation of the antitrust laws. I tend to agree with most of this analysis. I don’t take issue with the fact that the product must remain free, Apple has released their latest Mavericks operating system for free and I take no issue with that. My hypothetical posed in this blog is based around additional evidence being uncovered through discovery which amounts to a conspiracy claim. It’s all very hypothetical, which is consistent with evaluating a potential conspiracy claim.




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