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Re: Hey Terekhov: Wallace lost. Who'd guess.... ;)
|
From: |
Alexander Terekhov |
|
Subject: |
Re: Hey Terekhov: Wallace lost. Who'd guess.... ;) |
|
Date: |
Tue, 18 Jul 2006 11:14:14 +0200 |
Alexander Terekhov wrote:
>
> Alexander Terekhov wrote:
> [...]
> > Both courts ruled (and erred) on the issue of injury (standing). It's
> > the same legal situation as with a case asserting patent infringement
> > (for example) filed by someone not owning enforceable rights.
> >
> > Try reading
> >
> > http://www.ll.georgetown.edu/FEDERAL/judicial/fed/opinions/02opinions/02-1555.html
>
> RedHat and Novell filed reply brief in Wallace appeal action.
IBM's reply:
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<pre>
No. 06-2454
In the
United States Court of Appeals
for the Seventh Circuit
DANIEL WALLACE,
Plaintiff-Appellant
v.
INTERNATIONAL BUSINESS MACHINES CORPORATION,
RED HAT, INC., AND NOVELL, INC.,
Defendants-Appellees
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division
Case No. 1:05-cv-00678-RLY-VSS
The Honorable Judge Richard L. Young
RESPONSE BRIEF OF DEFENDANT-APPELLEE
INTERNATIONAL BUSINESS MACHINES CORPORATION
Michael Gottschlich (#22668-49)
Kendall Millard (#25430-49)
BARNES & THORNBURG LLP
11 South Meridian Street
Indianapolis, Indiana 46204
Tel: (317) 236-1313
Fax: (317) 231-7433
Attorneys for Defendant International Business Machines Corporation
CIRCUIT RULE 26.1 DISCLOSURE STATEMENT
06-2454
Appellate Court No:
Daniel Wallace v. International Business Machines Corp., et al.
Short Caption:
To enable the judges to determine whether recusal is necessary or appropriate,
an attorney for a
non-governmental
party or amicus curiae, or a private attorney representing a government party,
must furnish a disclosure
statement
stating the following information in compliance with Circuit Rule 26.1.
The Court prefers that the disclosure statement be filed immediately following
docketing; but, the
disclosure
statement must be filed within 21 days of docketing or upon the filing of a
motion, response, petition, or
answer in
this court, whichever occurs first. Attorneys are required to file an amended
statement to reflect any
material
changes in the required information. The text of the statement must also be
included in front of the table
of contents
of the party's main brief. Counsel is required to complete the entire statement
and to use N/A for any
information that is not applicable if this form is used.
(1) The full name of every party that the attorney represents in the case (if
the party is a corporation,
you must
provide the corporate disclosure information required by Fed. R. App. P. 26.1
by completing the item #3):
International Business Machines Corporation
(2) The names of all law firms whose partners or associates have appeared for
the party in the case
(including
proceedings in the district court or before an administrative agency) or are
expected to appear for the
party in this
court:
Barnes & Thornburg LLP
(3) If the party or amicus is a corporation:
i) Identify all its parent corporations, if any; and
None
ii) list any publicly held company that owns 10% or more of the party's or
amicus' stock:
None
Attorney's Signature: s/Michael Gottschlich Date:
July 17, 2006
Attorney's Printed Name: Michael Gottschlich*
Address: 11 South Meridian Street
Indianapolis, Indiana 46204
Phone Number: (317) 231-7834
Fax Number: (317) 231-7433
MGOTTSCH@BTLaw.com
E-Mail Address:
Attorney's Signature: s/Kendall Millard Date:
July 17, 2006
Attorney's Printed Name: Kendall Millard
Address: same as above
Phone Number: (317) 231-7461
Fax Number: (317) 231-7433
KMILLARD@BTLaw.com
E-Mail Address:
* Counsel of Record for the above listed party pursuant to Circuit Rule 3(d).
ii
TABLE OF CONTENTS
Page
JURISDICTIONAL STATEMENT
...............................................................................................
1
STATEMENT OF THE
ISSUES....................................................................................................
1
STATEMENT OF THE
CASE.......................................................................................................
1
STATEMENT OF FACTS
.............................................................................................................
2
SUMMARY OF THE ARGUMENT
.............................................................................................
4
STANDARD OF REVIEW
............................................................................................................
6
ARGUMENT..................................................................................................................................
6
I. The District Court Properly Dismissed The Second Amended Complaint
Because
Wallace's Allegations Of Injury As A Competitor Show That He Suffered
No
Antitrust Injury.
...................................................................................................................
6
A. This Court Has Repeatedly Affirmed Dismissal Under Fed. R. Civ. P.
12(b)(6) Where The Plaintiff's Allegations Negate An Essential
Element of
the Claimed Antitrust
Violation...................................................................................
7
B. Wallace's Allegations Show He Cannot Prove Injury to Consumers or
to
Competition.
................................................................................................................
8
C. Wallace Cannot Prove Antitrust Injury Under a Predatory Pricing
Theory. ............. 10
II. Wallace's Complaint Also Fails To State A Claim Under The Rule Of
Reason............... 12
A. Wallace's Claims Must Be Analyzed Under The Rule of Reason.
........................... 13
B. Wallace's Allegations Demonstrate He Cannot Show Any Unreasonable
Restraint In A Relevant
Market.................................................................................
17
III. The Prior Unappealed Decision Of The District Court In The Wallace v.
Free
Software Foundation Action Precludes Plaintiff From Relitigating The
Issue Of
Antitrust Injury In This
Action..........................................................................................
18
CONCLUSION.............................................................................................................................
19
CERTIFICATE OF SERVICE
.....................................................................................................
20
iii
TABLE OF AUTHORITIES
FEDERAL CASES
Page
42nd Parallel North v. E Street Denim Co., 286 F.3d 401 (7th Cir. 2002)
...............5, 7, 12, 17, 18
Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328
(1990)................................................6
BCB Anesthesia Care, Ltd. v. Passavant Memorial Area Hospital Association,
36 F.3d 664 (7th Cir. 1994)
...........................................................................................8,
17
Ball Memorial Hospital, Inc. v. Mutual Hospital Insurance, Inc.,
784 F.2d 1325 (7th Cir. 1986)
.............................................................................................9
Broadcast Music, Inc. v. Columbia Broadcasting Systems, Inc., 441 U.S. 1
(1979)...............14, 15
Brooke Group Ltd. v. Brown & Williamson Tobacco Corporation,
509 U.S. 209
(1993)...........................................................................................................10
Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977)
.........................................4,
8
Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717
(1988)....................5, 12, 13
Car Carriers Inc. v. Ford Motor Co., 745 F.2d 1101 (7th Cir.
1984).................................5, 12, 13
Elliott v. United Center, 126 F.3d 1003 (7th Cir.
1997)..................................................................8
Endsley v. City of Chicago, 230 F.3d 276 (7th Cir.
2000)...............................................................7
Generac Corp. v. Caterpillar Inc., 172 F.3d 971 (7th Cir
1999).............................................13, 14
Grip-Pak, Inc. v. Illinois Tool Works, Inc., 694 F.2d 466 (7th Cir. 1982)
......................................9
Gutierrez v. Peters, 111 F.3d 1364 (7th Cir.1997)
..........................................................................6
James Cape & Sons Co. v. PCC Construction Company,
____ F.3d ____, available at 2006 WL 1751886 (7th Cir. June 28,
2006)......................7, 8
Kirksey v. R.J. Reynolds Tobacco Co., 168 F.3d 1039 (7th Cir. 1999)
...........................................7
Leatherman v. Tarrant County Narcotics Unit, 507 U.S. 163 (1993)
.............................................7
iv
MCI Communications Corp. v. American Telephone and
Telegraph Co., 708 F.2d 1081 (7th Cir. 1983)
............................................................10, 11
MCM Partners, Inc. v. Andrews-Bartlett & Associate, Inc.,
62 F.3d 967 (7th Cir. 1995)
.................................................................................................7
Matsushita Electric Industrial Co. v. Zenith Radio Corp.,
475 U.S. 574
(1986).............................................................................................5,
7, 10,
11
Midwest Gas Service Inc. v. Indiana Gas Company, Inc.,
317 F.3d 703 (7th Cir. 2003)
.......................................................................................6,
8, 9
National Collegiate Athletic Association v. Board of Regents of the
University of Oklahoma, 468 U.S. 85 (1984)
....................................................................14
ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.
1996).......................................................13, 16
Professional Real Estate Investors, Inc. v. Columbia Pictures
Industries, Inc., 508 U.S. 49
(1993).....................................................................................9
Stamatakis Industries, Inc. v. King, 965 F.2d 469, (7th Cir. 1992)
.................................................8
State Oil v. Kahn, 522 U.S. 3 (1997)
...................................................................................5,
13, 16
Tri-Genl Inc. v. International Union of Operating Engineers,
Local 150, AFL-CIO, 433 F.3d 1024 (7th Cir.
2006)..........................................................8
United States Gypsum Co. v. Indiana Gas Co., Inc., 350 F.3d 623 (7th Cir.
2003).......................8
United States v. Line Material Co., 333 U.S. 287
(1948)..............................................................15
United States v. New Wrinkle, Inc., 342 U.S. 371
(1952)..............................................................15
United States v. U.S. Gypsum, 333 U.S. 364
(1948)......................................................................15
Wade, Matter of, 969 F.2d 241 (7th Cir. 1992)
...............................................................................6
Wallace v. Free Software Foundation, Inc., 1:05-cv-0618-JDT-TAB
(S.D. Ind. 2006)
.............................................................................................................2,
18
Wright v. Associate Int. Cos., 29 F.3d 1244 (7th Cir.
1994)............................................................6
Zinermon v. Burch, 494 U.S. 113
(1990).........................................................................................6
v
FEDERAL STATUTES
17 U.S.C. § 301
.......................................................................................................................15,
16
Fed. R. App. P. 28(i)
.....................................................................................................................18
Fed. R. Civ. P. 12(b)
..........................................................................................................
1, passim
vi
JURISDICTIONAL STATEMENT
Appellant's jurisdictional statement is complete and correct.
STATEMENT OF THE ISSUES
I. Whether the Second Amended Complaint fails to state an
antitrust claim because
the alleged injury inability to compete with "Free Software" is not
antitrust injury, as a matter
of law.
II. Alternatively, whether the Second Amended Complaint fails to
state an antitrust
claim under the rule of reason because the facts alleged negate any inference
of market power or
adverse effect on competition.
STATEMENT OF THE CASE
Plaintiff Daniel Wallace filed his original complaint on May 9, 2005,
alleging violations
of the antitrust laws. Dkt. 1.1 Defendants International Business Machines
Corp., Red Hat, Inc.
and Novell, Inc. filed motions to dismiss for failure to state a claim under
Fed. R. Civ. P.
12(b)(6), arguing, among other things, that plaintiff's allegations
demonstrated that there was no
antitrust injury and no adverse impact in a relevant market under the rule of
reason. Dkts. 17, 18,
25, & 26.
Abbreviations used herein include: "Dkt." refers to the district court docket
number for the
1
cited items; "Appeal Brief" refers to Wallace's brief on this appeal, dated
June 14, 2006; "Order"
refers to the district court's "Entry on Defendants' Motions to Dismiss," dated
May 16, 2006,
Dkt. 59; "SAC" refers to Wallace's Second Amended Complaint, Dkt. 48,
Attachment #1;
"GPL" refers to the GNU General Public License, attached to Wallace's
complaint, Dkt. 1,
Attachment #1 and included in the Short Appendix as Exhibit A. The Short
Appendix to the
Appeal Brief is unpaginated, so page number references are to those in the
original document.
Wallace obtained leave of court to amend, and filed an Amended Complaint
on July 12,
2005. Dkt. 29. Defendants again timely filed motions to dismiss, arguing that
Wallace's claim
still failed for the same reasons. Dkts. 32. 33, & 40.
Wallace filed another motion to amend on December 1, 2005, which motion
was granted.
Dkts. 48 & 50. Defendants timely reasserted their previous motions to dismiss,
arguing that
Wallace's amendments did not cure the lack of antitrust injury or show any
adverse impact on
competition. Dkts. 51, 52 & 53.
Judge Young granted the motions to dismiss on May 16, 2006, ruling that
the Second
Amended Complaint did not state a claim "because it fails to allege
anticompetitive effects in an
identifiable market," and "failed to allege a cognizable antitrust injury."
Order at 3-4. This
appeal followed. 2
STATEMENT OF FACTS
The GNU General Public License ("GPL"), the "agreement" that Wallace
alleges has
caused him harm, is the license that forms the legal heart of a large quantity
of "free" or "open
source software."3 SAC at 2; Appeal Brief at 3. For more than a decade,
thousands of software
developers have contributed code to such "free software" programs, including
the GNU/Linux
2
Wallace brought a nearly identical action against the Free Software
Foundation, which was
also dismissed with prejudice for lack of any antitrust injury. See Wallace v.
Free Software
Foundation, Inc., 1:05-cv-0618-JDT-TAB (S.D.Ind. 2006) (Tinder, J.). Plaintiff
did not appeal
the dismissal of that matter.
Open source software "is computer software whose source code is available
under a copyright
3
license that permits users to study, change, and improve the software, and to
redistribute it in
Wikipedia,
modified or unmodified form."
Open-source software,
http://en.wikipedia.org/wiki/Open-source_software (last modified July 10, 2006)
("The open
source movement is a large movement of computer scientists, programmers, and
other computer
users that advocates unrestricted access to the source code of software.") See
also Wikipedia,
Linux, http://en.wikipedia.org/wiki/Linux (last modified July 10, 2006).
2
operating system ("Linux"). Appeal Brief at 2. The three defendants in this
case are among
"[l]iterally thousands of independent software developers worldwide" who have
contributed code
to Linux, subject to the terms of the GPL. Id.
According to its Preamble, the purpose of the GPL is to guarantee the
"freedom to share
and change free software--to make sure the software is free for all its users."
GPL at 1. The
Preamble goes on to explain that:
To protect your rights, we need to make restrictions that
forbid anyone to
deny you these rights or to ask you to surrender the rights. These
restrictions
translate to certain responsibilities for you if you distribute copies
of the software,
or if you modify it.
For example, if you distribute copies of such a program,
whether gratis or
for a fee, you must give the recipient all the rights that you have.
You must make
sure that they, too, receive or can get the source code. And you must
show them
these terms so they know their rights.
Id.
Under the license, anyone can freely use, copy, distribute and modify
any computer
programs that are subject to the GPL, on the condition that any modifications
they make are
licensed, if at all, under the same terms. Id. This purpose is effectuated by
Section 2(b) of the
GPL, which provides that:
You must cause any work you distribute or publish, that in whole
or in
part contains or is derived from the Program [i.e., a work already
subject to the
GPL] or any part thereof, to be licensed as a whole at no charge to all
third parties
under the terms of this License.
Id. at 2.
The GPL, by its terms, applies only to programs and other works that
have been
distributed pursuant to the GPL. Id. at 2. It does not apply to programs
created independently
that do not use or derive from code covered by the GPL.
3
Wallace alleges the GPL amounts to illegal "price fixing" at "zero." SAC
at 2; Appeal
Brief at 8. He also argues that any licensing of software under the GPL must be
"predatory" as
the price of "no charge" is necessarily less than the cost of creating the
software. SAC at 3;
Appeal Brief at 10.
Wallace alleges he is injured by the defendants' use of the GPL because
he is unable to
market "his own computer operating system as a competitor." SAC at 2. He
explains he is a
computer programmer who wants to market his own operating system "under a
proprietary
business model," licensing his software "at a profit" in the future. Appeal
Brief at 3-4. He
alleges he is foreclosed from pursuing this business model, however, because he
and others are
"faced with competition" from those who distribute free software under the GPL,
such as the
defendants in this case. Id. at 4.
SUMMARY OF THE ARGUMENT
Wallace's only allegation of injury is that use of the GPL "prevents
Plaintiff Daniel
Wallace from marketing his own computer operating system as a competitor,"
because he and
other software developers are "faced with competition" from software licensed
at "no charge."
SAC at 3; Brief at 4. This allegation of harm affirmatively negates the
antitrust injury required
for standing in an antitrust case because it results from additional
competition in the marketplace
and benefits consumers, and is therefore not the type of injury Congress
intended to protect
against in passing the antitrust laws. See Brunswick Corp. v. Pueblo
Bowl-O-Mat, Inc., 429 U.S.
477, 488 (1977). Wallace's proposed injunction would harm consumers by raising
prices. His
claim to competitor standing through a predatory pricing theory fails, among
other reasons,
because the facts he alleges show that defendants could never recoup the
alleged lost profits by
4
raising prices in the future. See Matsushita Electric Industrial Co. v. Zenith
Radio Corp., 475
U.S. 574, 597-598 (1986).
Wallace's claim also negates necessary elements of an antitrust claim
under the rule of
reason. His claim that the license fee charged to subsequent licensees of GPL
programs are
"fixed" at "no charge" is best analyzed as a challenge to a vertical non-price
restraint, or at most
as a maximum vertical price fixing agreement, either of which would be reviewed
under the rule
of reason. See State Oil v. Kahn, 522 U.S. 3 (1997); Business Electronics Corp.
v. Sharp
Electronics Corp., 485 U.S. 717, 735 (1988). Wallace, however, affirmatively
alleges facts that
negate any anticompetitive effects in a relevant market. Specifically, the
facts pled negate any
inference that the defendants had market power, an element required to show
anticompetitive
effects. See 42nd Parallel North v. E Street Denim Co., 286 F.3d 401, 404 (7th
Cir. 2002).
Wallace amended his complaint twice after defendants alerted him to its
shortcomings,
further demonstrating that the flaws in his claims are inherent and cannot be
cured. See Car
Carriers Inc. v. Ford Motor Co., 745 F.2d 1101, 1105 & n.12 (7th Cir. 1984)
(upholding
dismissal with prejudice where the problems with the complaint were inherent
and incurable).
Wallace alleges he is a future competitor who may be harmed because of
increased competition,
but this is not the type of harm the antitrust laws were designed to prevent.
The district court
was correct to dismiss this action for "failure to allege a cognizable
antitrust injury" and
"because it fails to allege anticompetitive effects in an identifiable market,"
Opinion at 3-4,
which decision should be affirmed.
5
STANDARD OF REVIEW
The Court reviews de novo the grant of a Rule 12(b)(6) motion to
dismiss, and must
accept the factual allegations by the plaintiff as true, drawing all reasonable
inferences in favor
of the plaintiff. Midwest Gas Service Inc. v. Indiana Gas Company, Inc., 317
F.3d 703, 709 (7th
Cir. 2003). Additional facts alleged by a pro se plaintiff in briefing may be
considered so long as
they are consistent with the allegations of the complaint. Gutierrez v. Peters,
111 F.3d 1364,
1367 n. 2 (7th Cir.1997). Further, as Wallace says in his brief, Appeal Brief
at 5, a document
attached to the complaint is part of the complaint and may properly be
referenced in ruling on a
motion to dismiss. Zinermon v. Burch, 494 U.S. 113, 118 (1990); Wright v.
Assoc. Int. Cos., 29
F.3d 1244, 1248 (7th Cir. 1994) (holding that documents referenced in the
complaint that are
central to the claim are part of the pleadings). A plaintiff may "plead himself
out of court by
attaching documents to the complaint that indicate he or she is not entitled to
judgment." Matter
of Wade, 969 F.2d 241, 249 (7th Cir. 1992).
ARGUMENT
I. The District Court Properly Dismissed The Second Amended Complaint
Because
Wallace's Allegations Of Injury As A Competitor Show That He Suffered No
Antitrust Injury.
Wallace's claims demonstrate that he cannot show the antitrust injury
required for
standing in an antitrust case. See Atlantic Richfield Co. v. USA Petroleum Co.,
495 U.S. 328,
342 (1990) (a plaintiff must show "antitrust injury" as a preliminary matter to
have standing to
bring a case, ensuring "that the harm claimed by the plaintiff corresponds to
the rationale for
finding a violation of the antitrust laws in the first place."). Wallace's own
allegations make
clear that as a competitor seeking to charge a higher price to consumers, the
relief he seeks
would harm consumers and not benefit them.
6
Wallace's attempt to derive standing as a competitor under a predatory
pricing theory
does not change the analysis, as he still cannot show any injury to consumers
or to competition.
Furthermore, his allegations negate any inference that defendants had any
expectation of
recovering any losses by raising prices in the future, a required element under
such a theory. See
Matsushita, 475 U.S. at 597-598.
A. This Court Has Repeatedly Affirmed Dismissal Under Fed. R. Civ.
P.
12(b)(6) Where The Plaintiff's Allegations Negate An Essential
Element of
the Claimed Antitrust Violation.
Wallace quotes Kirksey v. R.J. Reynolds Tobacco Co., 168 F.3d 1039, 1041
(7th Cir.
1999), for the uncontested proposition that a plaintiff need only file a short
statement of the legal
claim in order to state a claim in federal court. Appeal Brief at 5. The court
in Kirksey,
however, affirmed the dismissal under Rule 12(b)(6), holding that although
plaintiff had an
"admirably succinct" complaint, it had no "legal merit." Kirksey at 1041.
Moreover, although there is no heightened pleading standard in antitrust
cases, MCM
Partners, Inc. v. Andrews-Bartlett & Assoc., Inc., 62 F.3d 967, 972 (7th Cir.
1995) (citing
Leatherman v. Tarrant County Narcotics Unit, 507 U.S. 163 (1993)), where
"plaintiffs fail to
identify any facts from which the court can infer" the existence of the
elements of an antitrust
claim, the "claim may be properly dismissed." Endsley v. City of Chicago, 230
F.3d 276, 282
(7th Cir. 2000) (affirming dismissal of antitrust case where allegations did
not permit a
reasonable inference that the defendant had market power) (internal citation
omitted).
Indeed, this Court consistently affirms the dismissal of antitrust cases
when the plaintiff's
claim could not support an antitrust violation. See, e.g. James Cape & Sons Co.
v. PCC
Construction Company, F.3d , available at 2006 WL 1751886 at *3
(7th Cir. June 28,
7
2006) (affirming dismissal where facts alleged showed no antitrust injury);
Midwest Gas
Services, Inc. v. Indiana Gas Co., Inc., 317 F.3d 703, 710 (7th Cir. 2003)
(affirming dismissal of
a plaintiff because it "cannot demonstrate that it has suffered an antitrust
injury"); 42nd Parallel
North v. E Street Denim Co., 286 F.3d 401, 405 (7th Cir. 2002) (affirming
dismissal because
facts alleged negated a reasonable inference that defendant had market power);
Elliott v. United
Center, 126 F.3d 1003, 1005 (7th Cir. 1997) (affirming dismissal because
plaintiffs failed to
plead a viable relevant market); BCB Anesthesia Care, Ltd. v. Passavant
Memorial Area
Hospital. Association, 36 F.3d 664, 669 (7th Cir. 1994) (affirming dismissal
where there was no
reason to infer an impact on competition in a relevant market).
B. Wallace's Allegations Show He Cannot Prove Injury to Consumers
or to
Competition.
Congress passed the antitrust laws to protect consumers from higher
prices, not to enable
a competitor to charge for something the consumer would otherwise have been
able to use freely.
See generally Brunswick, 429 U.S. at 488 ("The antitrust laws . . . were
enacted for `the
protection of competition, not competitors.'") (citation omitted); James Cape &
Sons, 2006 WL
1751886 *2 (affirming dismissal for lack of antitrust standing because the
alleged bid-rigging
conspiracy would have resulted in lower prices to consumers); Tri-Gen Inc. v.
International
Union of Operating Engineers, Local 150, AFL-CIO, 433 F.3d 1024, 1031-1032 (7th
Cir. 2006)
("To have standing as a competitor, [plaintiff] needed to show that its `loss
comes from acts that
reduce output or raise prices to consumers' ... `a producer's loss is no
concern of the antitrust
laws, which protect consumers from suppliers rather than suppliers from each
other.'") (quoting
Stamatakis Industries, Inc. v. King, 965 F.2d 469, 471 (7th Cir. 1992)); United
States Gypsum Co.
v. Indiana Gas Co., Inc., 350 F.3d 623, 627 (7th Cir. 2003) ("A plaintiff who
wants something,
such as less competition or higher prices, that would injure consumers, does
not suffer antitrust
8
injury."); Ball Memorial Hospital, Inc. v. Mutual Hospital Insurance, Inc., 784
F.2d 1325, 1334
(7th Cir. 1986) ("When the plaintiff is a poor champion of consumers, a court
must be especially
careful not to grant relief that may undercut the proper functions of
antitrust."). A competitor
who cannot make as much profit as he would like or enter a market he would
like to enter
because the prices are too low does not have standing to bring a case under
Section One of the
Sherman Act. See Midwest Gas, 317 F.3d at 713 ("failure to realize expected
profits due to
competition is not an antitrust injury...").4
Yet, a higher price for the consumer is precisely what Wallace is
seeking. He alleges he
is a competitor (or potential competitor) of companies licensing software under
the GPL. SAC at
3. He wants to be able to license his own software to consumers, but feels he
is unable to
compete against the "price" of "no charge" for Linux software licenses. Id. at
2-3. He therefore
seeks a nation-wide injunction to prohibit "the development and distribution of
the Linux
operating system" under the terms of the GPL, so that he can enter the market
with "his own
computer operating system," and, one must assume, charge consumers to use it.
Id. The
plaintiff by his own allegations has demonstrated that he is "a poor champion
of consumers,"
Ball Mem. Hosp. at 1334, and has therefore plead himself out of court.
Further, common sense dictates that a licensing system that requires
consumers to incur
"no charge" to use and copy the programs would benefit consumers, not harm
them. As the
district court noted, "the GPL benefits consumers by allowing for the
distribution of software at
4
To the extent plaintiff is trying to claim standing as a potential entrant
into some relevant
market, he also fails to meet the "intention and preparedness" requirement for
antitrust standing.
See Grip-Pak, Inc. v. Illinois Tool Works, Inc., 694 F.2d 466, 475 (7th Cir.
1982), disapproved of
on other grounds by Professional Real Estate Investors, Inc. v. Columbia
Pictures Industries,
Inc., 508 U.S. 49 (1993).
9
no cost, other than the cost of the media on which the software is
distributed." Opinion at 3.
The GPL requires that any modifications to existing GPL software, such as bug
fixes and the
addition of features to improve the software, be licensed free of charge to any
subsequent
licensees, if distributed at all. GPL at 1-2. This permits the improved
software to be distributed
and used widely and results in a benefit to all who use it. Id. It is difficult
to imagine what
"injury" flows to consumers from such an arrangement. Wallace therefore does
not even come
close to stating a claim that could meet the requirement that a plaintiff show
he suffered an
antitrust injury.
C. Wallace Cannot Prove Antitrust Injury Under a Predatory Pricing
Theory.
Wallace's allegation that the GPL is "predatory" does not alter the
standing analysis. The
rationale for recognizing that competitors can sometimes suffer an antitrust
injury rests not on
the injury to the competitor, but to subsequent injury to the consumer or to
competition once the
competitor is out of business. See Brooke Group Ltd. v. Brown & Williamson
Tobacco
Corporation, 509 U.S. 209, 224 (1993) ("That below-cost pricing may impose
painful losses on
its target is of no moment to the antitrust laws if competition is not
injured.") The mere
invocation of the term "predatory" does not bestow standing on a plaintiff
where, as in this case,
his own allegations demonstrate that the GPL actually benefits consumers.
Moreover, to prove antitrust injury as a competitor under a predatory
pricing theory,
Wallace must prove that the defendants licensed code under the GPL at a loss
with "a reasonable
expectation of recovering, in the form of later monopoly profits, more than the
losses suffered."
Matsushita, 475 U.S. at 597-598. See also Brooke Group at 225 ("For recoupment
to occur,
below-cost pricing must be capable, as a threshold matter, of producing the
intended effects on
the firm's rivals."); MCI Communications Corp. v. American Telephone and
Telegraph Co., 708
10
F.2d 1081, 1112 (7th Cir. 1983) ("Predatory pricing is prohibited because of
the fear that a
monopoly or dominant firm will deliberately sacrifice present revenues for the
purpose of
driving rivals from the market and then recoup its losses through higher
profits earned in the
absence of competition."). That is, Wallace must be able to show that
defendants (1) sacrificed
present revenues (2) with a reasonable expectation of recouping such lost
revenues through
higher prices after competitors have been driven from the market. MCI
Communications at
1112.
Wallace's own allegations demonstrate that he could never prove facts
sufficient to
support either of these elements. He alleges that "any lost profits" that
defendants incurred from
licensing software at no charge under the GPL are "recouped through ancillary
Linux markets
such as proprietary licensed middleware, computer hardware, information
technology consulting
and software support services." Appeal Brief at 3. Under Wallace's allegations,
therefore,
defendants do not "sacrifice present revenues," as they allegedly obtain
present revenues from
sales in "ancillary markets."5
Nor could Wallace prove that defendants had any reasonable
expectation of recouping
profits after the alleged scheme to drive competition from the market
succeeded. First, since
defendants and any other licensees must license any work derived from the GPL
software "at no
charge to all third parties" as Wallace alleges, GPL at 2, "recoupment" by
raising prices on
software licensed under the GPL is impossible. Second, as the Supreme Court in
Matsushita
noted, long-term predatory pricing schemes among competitors are "especially"
unlikely to
occur, Matsushita at 590, and in this case would be impossible to maintain
among the "[l]iterally
Wallace does not claim any antitrust violations in these "ancillary
markets."
5
11
thousands of independent software developers worldwide" that have used the GPL
over the last
decade, Appeal Brief at 2, each of whom would also need to be able to recoup
its losses. See
also 42nd Parallel, 286 F.3d at 406 ("In considering a motion to dismiss, the
court is not
required to don blinders and to ignore commercial reality.") (quoting Car
Carriers, 745 F.2d at
110). Third, Wallace alleges he is "prevented" from entering the market, SAC at
3, so there
cannot be some point in the future when he is "driven" from it to make
supra-competitive prices
possible.
In sum, Wallace has shown through his own allegations that he has
suffered no antitrust
injury, as a competitor or otherwise. Even if it is true that he feels deterred
from marketing his
own software because he is "faced with competition" from software licensed
under the GPL,
Appeal Brief at 4, that does not state a claim under the antitrust laws.
Because the Second
Amended Complaint shows conclusively that Wallace lacks standing to sue because
he has
suffered no antitrust injury, the Court should affirm the district court's
dismissal of this action.
II. Wallace's Complaint Also Fails To State A Claim Under The Rule Of Reason.
The dismissal must also be affirmed because Wallace's own allegations
show that he
cannot prove an adverse effect on competition in a relevant market as required
under the rule of
reason. Wallace's claims must be analyzed under the rule of reason, as a
vertical nonprice
restraint, or at most, a vertical maximum price restraint. See Business
Electronics 485 U.S. at
724; State Oil, 522 U.S. at 22. Because the allegations negate any inference
that defendants had
the market power necessary to show an adverse impact to competition in a
relevant market, as
required for any rule of reason case, 42nd Parallel, 286 F.3d at 404, the
dismissal of this case
must be affirmed.
12
A. Wallace's Claims Must Be Analyzed Under The Rule of Reason.
The rule of reason is the appropriate analytical framework for Wallace's
claims because
licensing under the GPL, the allegedly illegal "agreement," is necessarily a
vertical relationship
unsuitable for per se treatment. The relationship between a licensor and
a licensee is
fundamentally a vertical, not a horizontal, relationship. See Generac Corp. v.
Caterpillar Inc.,
172 F.3d 971, 977 (7th Cir 1999) (holding that the licensing of intellectual
property rights created
a vertical relationship for antitrust analysis, even if the licensee and
licensor were competitors in
other contexts); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1450 (7th Cir. 1996)
("[W]e treat the
[software] licenses as ordinary contracts accompanying the sale of products.")
The only
"agreement" Wallace alleges is the GPL license itself, SAC at 2, and the
defendants' use of the
GPL at most creates vertical relationships.
The term of the GPL that requires licensing at "no charge" is therefore
most analogous to
a vertical nonprice restraint subject to the rule of reason. See Business
Electronics at 724
(holding that vertical nonprice restraints are not subject to per se analysis.)
Even if the claim
were analyzed as a vertical maximum price fixing case, however, it would still
be subject to the
rule of reason. See State Oil, 522 U.S. at 22 ("Vertical maximum price fixing,
like the majority
of commercial arrangements subject to the antitrust laws, should be evaluated
under the rule of
reason.").
Wallace argues that per se rather than rule of reason analysis should
apply to this case
because the GPL is a "cross license among the owners of intellectual property"
constituting
"price-fixing" at zero. Appeal Brief at 7-8 (emphasis omitted). Wallace's
allegations of a per se
violation, however, "must be scrutinized to determine whether such a
characterization is
appropriate," Car Carriers, 745 F.2d at 1108, because "we should not throw
labels like per se
13
around loosely, without some appreciation for the economic arrangements we are
evaluating."
Generac, 172 F.3d at 977.
The Supreme Court has made clear that allegations of price-fixing among
competitors
through the pooling of their copyrights are to be analyzed under the rule of
reason. Broadcast
Music, Inc. v. Columbia Broadcasting Systems, Inc., 441 U.S. 1, 19 (1979)
(holding that
allegation of price-fixing through blanket licenses of copyright and
performance right pools were
to be analyzed under the rule of reason, noting that "we would not expect that
any market
arrangements reasonably necessary to effectuate the rights that are granted [by
the Copyright
Act] would be deemed a per se violation of the Sherman Act."). See also
National Collegiate
Athletic Association v. Board of Regents of the University of Oklahoma, 468
U.S. 85, 101 (1984)
(applying rule of reason to competitor agreements to restrain marketing
efforts).
In Broadcast Music, plaintiff CBS, the owner of a television network and
radio stations,
alleged that the copyright pooling and blanket licensing of copyrighted musical
compositions at
fees set by defendants Broadcast Music Inc. (BMI) and the American Society of
Composers,
Authors and Publishers (ASCAP) constituted per se price fixing. Broadcast Music
at 4-6. The
Supreme Court held that even though the prices BMI and ASCAP set were "price
fixing" in the
literal sense, the per se rule was "overly simplistic and overly broad" in the
context of copyright
licensing among thousands of license owners, and applied the rule of reason.
Id. at 9. The
relevant inquiry is "whether the practice facially appears to be one that would
always or almost
always tend to restrict competition and decrease output." Id. at 19-20.
Wallace apparently attempts to distinguish Broadcast Music, asserting
that programmers
using the GPL are "owners of the intellectual property," whereas musical
recordings "are
14
licensed to a third party for vending efficiency." Appeal Brief at 7 n.5
(emphasis in original).
Like the blanket licenses in Broadcast Music, though, the "parties" to the GPL
do not negotiate
with each other for the terms of the agreement, but rather accept the terms as
a function of the
licensing system itself. The "ownership" interests contributors to software
licensed under the
GPL might have in their modifications are seriously limited, given that any
distribution of those
modifications must be done under the terms of the GPL. Further, there is no
reason why the
presence of a third party as the conduit for price fixing would prevent a case
from receiving per
se treatment if that were otherwise the appropriate analysis.
Wallace also cites three cases from the 1940's and 50's for the notion
that "where
pooling or cross-licensing agreements are price-fixing arrangements, they will
be subject to the
per se rule." Appeal Brief at 7. The cases cited, however, concern challenges
to the defendants'
extension of the patent monopoly to other products and are inapposite to the
present case. See
United States v. New Wrinkle, Inc., 342 U.S. 371, 378-379 (1952) (noting that a
cross-licensing
of patents "beyond the limits of the patent monopoly" to control prices on
"unpatented products"
violates the Sherman Act.); United States v. U.S. Gypsum, 333 U.S. 364, 400
(1948) (finding a
conspiracy to use patents to suppress the development and fix the prices of
unpatented products
violated the antitrust laws); and United States v. Line Material Co., 333 U.S.
287, 314 (1948)
(finding patent holders entered an agreement to fix prices on their respective
products). The
GPL, however, does not seek to extend intellectual property rights beyond those
conferred by
Congress.6
6
Although it is not clear how it is relevant to his antitrust claims,
plaintiff also asserts that the
GPL "is both contractually unenforceable and preempted by 17 U.S.C. § 301."
Appeal Brief at
6. [footnote continued on following
page]
15
Wallace also attempts to refute the application of rule of reason
analysis by
characterizing the GPL as being both a minimum and maximum price restraint.
Appeal Brief at
8. Wallace argues that the per se rule should apply because the GPL "fixes both
the maximum
(ceiling) and minimum (floor) price limits at zero (no charge)," Appeal Brief
at 8. The GPL is
not, however, a price restraint at all. To the contrary, it provides that there
shall be "no" price for
licenses to permit the licenses to be freely available to all. GPL at 2. The
Preamble to the GPL
is informative as to the nature of "free" software:
When we speak of free software, we are referring to freedom,
not price.
Our General Public Licenses are designed to make sure that you have the
freedom
to distribute copies of free software (and charge for this service if
you wish), that
you receive source code or can get it if you want it, that you can
change the
software or use pieces of it in new free programs; and that you know you
can do
these things.
Id. at 1 (emphasis added).
Even if the "no charge" required by the GPL were considered a "price,"
however, this
case would still be analyzed under the rule of reason as a vertical maximum
price restraint. See,
State Oil 522 U.S. at 22. Wallace's argument that "no charge" constitutes a
"minimum" price
for purposes of antitrust analysis is untenable. A "minimum" price agreement
requires that any
price below that price would violate the agreement. In the unlikely event a
licensor wished to
license modifications to software under the GPL at a price below zero (i.e., an
effective negative
Section 301 of 17 U.S.C., however, concerns the preemptive effect of the
Copyright Act with
respect to other laws and does not concern the enforceability of contracts or
the application of the
antitrust laws. To the contrary, as is evident from the ProCD case plaintiff
cites, Appeal Brief at
6 n.4, copyrights may be licensed by a uniform contract effective against all
who choose to use
it. ProCD, 86 F.3d at 1454. The court in ProCD held that a "shrinkwrap"
software license (a
license that accompanies software limiting its use) is an effective contract
under the UCC against
anyone who receives the terms of the license and uses the software. Id. at
1452. The court also
held that state enforcement of such contracts under the UCC would not be
preempted by the
Copyright Act or 17 U.S.C. § 301. Id. The GPL, like the shrinkwrap license in
ProCD, is a
license applicable to anyone who receives its terms and chooses to use it, and
by using it, accepts
the terms under which the software was offered. Id.
16
price by paying the licensee to take the license), such would in no way violate
the GPL.
Therefore, to the extent the GPL is a price restraint at all, it would still be
no more than a
maximum vertical restraint and subject to the rule of reason.
B. Wallace's Allegations Demonstrate He Cannot Show Any
Unreasonable
Restraint In A Relevant Market.
The facts Wallace alleges negate any inference that the GPL has
resulted in an
unreasonable restraint of trade or an anticompetitive effect in a relevant
market, as required for
all rule of reason cases. See 42nd Parallel, 286 F.3d at 404 (affirming
dismissal where the case
was "a nonstarter" because plaintiff had failed to allege an anticompetitive
effect on the market);
BCB Anesthesia, 36 F.3d at 669 (affirming dismissal where there was "little
reason to infer that
there [was] an impact on competition within the relevant market."). Moreover,
even after given
the chance to amend his complaint twice, Wallace failed to even allege and
the facts he did
allege negate that defendants had market power, a necessary step in proving
an anticompetitive
effect.
Because anticompetitive effects are difficult to measure, the Seventh
Circuit "has adopted
a threshold requirement, a `shortcut' as it were, that the plaintiff needs to
show that the defendant
has market power. A company has market power if it can raise prices above a
competitive level
without losing its business." 42nd Parallel, 286 F.3d at 405 (emphasis added;
internal citations
omitted).
Again, Wallace has plead himself out of court, as his own allegations
show he could
never prove that the defendants had market power in any relevant market. First,
by the terms of
the GPL itself, defendants could never raise prices on licensing above a
competitive level
because they cannot charge for licensing at all, and without the ability to
raise prices, there can
17
be no market power. GPL at 2; 42nd Parallel 286 F.3d at 405. Secondly, Wallace
alleges that in
addition to the defendants, there are "[l]iterally thousands of independent
software developers
worldwide" that have used the GPL during the last decade, belying any
possibility that
defendants could have market power. Appeal Brief at 2.7 Furthermore, Wallace
alleges the
effect of the GPL is to "publicly regulate" modifications to a collective work,
id., which by
definition would make it impossible for any individual company or group of
companies to
control it. Wallace's alleged facts negate the requisite market power by the
defendants, and
therefore he cannot show any anticompetitive effects.
In addition to negating market power in a cognizable market, Wallace has
made clear by
his allegations that he cannot show defendants' use of the GPL restrained trade
in that market, or
caused any anticompetitive effects. As discussed in detail above, he seeks to
charge consumers
for something they now can obtain at no charge, and therefore does not allege
any adverse effect
on competition or on consumers.
III. The Prior Unappealed Decision Of The District Court In The Wallace v.
Free
Software Foundation, Inc. Action Precludes Plaintiff From Relitigating
The Issue Of
Antitrust Injury In This Action.
Pursuant to Fed. R. App. P. 28(i), IBM adopts by reference the Issues
section and Section
III of the Argument section of the Response Brief of Defendants-Appellees Red
Hat, Inc. and
Novell, Inc.
7
The existence of so many distributors of GPL software other than the three
defendants named
here also raises serious questions whether the injunction plaintiff seeks could
be effective in
preventing the use of the Linux operating system, as those not a party to this
case would clearly
not be bound by any such injunction.
18
CONCLUSION
This Court should affirm the dismissal of Wallace's Complaint.
Respectfully submitted,
s/ Michael Gottschlich
Michael Gottschlich (#22668-49)
Kendall Millard (#25430-49)
Barnes & Thornburg LLP
11 South Meridian Street
Indianapolis, Indiana 46204
Telephone: (317) 236-1313
Facsimile: (317) 231-7433
Attorneys for Defendant,
International
Business Machines Corporation
19
CERTIFICATE OF SERVICE
The undersigned hereby certifies that on the 17th day of July, 2006,
two copies of the
foregoing document was served via U.S. mail on the following:
Daniel Wallace
P. O. Box 572
New Palestine, IN 46163
Philip A. Whistler
Curtis W. McCauley
ICE MILLER
One American Square
P.O. Box 82001
Indianapolis, IN 46282
s/ Kendall Millard
Kendall Millard
INDS02 KMILLARD 817623v3
20
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