Wallace v. International Business Machines Corp.

• Decision Date: 09 November 2006
• Docket Number: No. 06-2454.,06-2454.
• Citation: 467 F.3d 1104
• Parties: Daniel WALLACE, Plaintiff-Appellant, v. INTERNATIONAL BUSINESS MACHINES CORPORATION; Red Hat, Inc.; and Novell, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

467 F.3d 1104

Daniel WALLACE, Plaintiff-Appellant, v. INTERNATIONAL BUSINESS MACHINES CORPORATION; Red Hat, Inc.; and Novell, Inc., Defendants-Appellees.

No. 06-2454.

United States Court of Appeals, Seventh Circuit.

Submitted October 26, 2006.

Decided November 9, 2006.

Daniel Wallace, New Palestine, IN, pro se.

Michael H. Gottschlich, Kendall H. Millard, Barnes & Thornburg, Philip A. Whistler, Curtis W. McCauley, Ice Miller, Indianapolis, IN, for Defendants-Appellees.

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, 97 S.Ct. 690, 50 L.Ed.2d 701 (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, 113 S.Ct. 2578, 125 L.Ed.2d 168 (1993); Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). This does not assist Wallace, 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....