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Red Hat and Novell Also File Motion to Dismiss Wallace
Wednesday, July 06 2005 @ 09:56 PM EDT

Red Hat and Novell have filed a Motion to Dismiss [PDF] Daniel Wallace's lawsuit, with prejudice. What? You are surprised?

: )

Here's the Memorandum in Support [PDF]. The court had granted their request for more time to answer, and the deadline was today. My thanks to the wonderfully fast *and* careful Henrik Grouleff, for the text.

The memorandum says that Red Hat and Novell join in IBM's arguments in their Motion to Dismiss, but they add one statement of reasons the Complaint should be dismissed with prejudice: "The Complaint Fails to Allege a Violation of the Sherman Act." Duh.

First, they argue, he failed to allege a per se case; it's Rule of Reason, and with Rule of Reason you have to allege "effects in a relevant market". The plaintiff "conspicuously fails to allege any effect on anyone other than himself." On top of that, he lacks standing, they conclude, because he hasn't suffered an "antitrust injury."

Then, just in case Mr. Wallace wants to argue some more and try to say it is per se, they add these paragraphs:

First, in Atlantic Richfield Companies v. USA Petroleum Company, 495 U.S. 328 (1990), the Court held that a competitor who alleged that he lost profits due to his competitor's vertical maximum price fixing scheme lacked standing to sue under the antitrust laws. A review of the terms of the GPL, specifically Section 2(b), disclosed that the Plaintiff has no standing to bring this Complaint, even if the alleged vertical maximum price fixing agreement were per se unlawful, which after State Oil v. Khan it plainly is not.

The fact that Plaintiff seeks only injunctive relief, rather than damages, does not save the Complaint from dismissal. In Cargill, Inc. v. Monfort of Colorado, 479 U.S. 104 (1986), the court held that antitrust injury requirement applies equally to plaintiffs seeking injunctive relief under Section 16 of the Clayton Act.

In short, under State Oil v. Khan, Plaintiff has not alleged a substantive violation of the Sherman Act. Moreover, under the Brunswick, Richfield, and Cargill cases, Plaintiff has not alleged any actual or threatened "antitrust injury" of the sort that would give him standing to sue. Therefore, even in Plaintiff had stated the elements of an antitrust violation -- which he has not -- the Complaint should still be dismissed.

Wallace has filed a Motion to Amend Complaint [PDF] in this case, presumably to try to fix the flaws that have been pointed out to him. He says he is filing pro persona, which means nothing that I know of, saying that he wants to amend "on the ground that justice will be fully served."

I don't know about that. How just is it to bring meritless claims that can't prevail but can annoy and harass? Then he signs off as pro se, which does mean something, so he knew the correct term. I continue to suspect an attempt to cynically play the judge, hoping to get all the breaks that an incompetent with no lawyer might get from a sympathetic judge. We'll see if it works. It won't if justice is fully served.

Oh, he has filed another Motion to Amend [PDF] the FSF complaint too. That would be the third time already, I think. It's like ping pong, this Wallace litigation, not a lawsuit. He files, his victims point out his mistakes, and then he alters his story to suit what he has learned is required. It's like going to law school the stupid way. A little theory first is a lot less painful.

But What's an "Anti-Trust Injury"?

I'll let Microsoft and IBM help me explain. Microsoft's Steve Ballmer has just said publicly that the cost of acquisition for Linux is less than for Windows but the total cost of ownership is actually less for Windows:

Because open-source products can, in general, be downloaded for free, Microsoft has to compete against them by drawing attention to the "total cost of ownership." It must make the case that, all things considered, Windows applications are cheaper over the long term.

Open source "is the first competitor we've ever had where our cost of acquisition is higher than their cost of acquisition," said Microsoft CEO Steve Ballmer. "Usually, we're able to come in and say, 'We're cheaper and better'...Here we have to say, 'lower total cost of ownership--and better.'"

I don't believe that, and you don't either, but it stands as their position for court purposes. They can't have it both ways. If the GPL results in software that actually costs more, despite being available for free, Mr. Wallace's posited injury doesn't exist, does it? Sorry, but that's what hahppens when you make foolish claims in public. Ballmer should have learned from what happened to Darl.

But note something else that will help you understand what an antitrust injury consists of, something IBM argued in its Motion to Dismiss:

Second, the alleged injury is not the type of injury Congress intended to protect against in passing the antitrust laws, so plaintiff cannot show the requisite antitrust injury. Plaintiff's alleged harm flows only from additional competition in the marketplace, which is not the sort of harm with which the antitrust laws are concerned. Plaintiff therefore has no standing to bring his claims and his case should be dismissed. . . .

The plaintiff alleges he is a competitor who may be harmed in the future because of increased competition. This is not the type of harm the antitrust laws were designed to prevent, and the complaint should therefore be dismissed with prejudice. . . .

B. Plaintiff Lacks Antitrust Injury.

In addition to showing a nexus between the alleged anticompetitive acts and the alleged harm, a plaintiff must also show an antitrust injury — that is, the type of injury the antitrust laws were designed to prevent. It is now axiomatic that "[t]he antitrust laws . . . were enacted for 'the protection of competition, not competitors.'" Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) (citation omitted).

The required showing of antitrust injury applies to the per se analysis as well as the rule of reason. In Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328 (1990), the Supreme Court held that a competitor who alleged only that he had lost sales and profits due to his competitor's vertical maximum price fixing scheme lacked the requisite antitrust injury to sue under the antitrust laws, regardless of whether a per se violation had been alleged. . . .

The injury alleged by the plaintiff in this case is not the requisite "antitrust injury." He does not allege an injury to competition or to the market, but only to himself as a competitor or potential competitor. His alleged lack of "opportunity" for him to "earn future revenue" is focused on his own income, not any injury to competition or consumers. Common sense dictates that a "licensing scheme" that requires consumers pay no more than zero dollars to use and copy the programs under the License would benefit consumers, not harm them, and any "injury" flowing from there could not be an "antitrust injury."

Plaintiff apparently alleges that he cannot compete because he is not able to earn income by licensing to others any modifications he made to a program he obtained for free under the License, given that all such modifications must also be licensed at no charge. This allegation also clearly fails the antitrust injury test. Here, even assuming plaintiff charged for distribution or servicing of the program (acts not prohibited by the License), plaintiff's potential customers would benefit from lower prices for licensing the modified program (i.e., no cost for the actual use of the program) compared with the price they would have to pay if plaintiff were permitted to charge for the license. Even if plaintiff were "injured" by his inability to license his modifications for a fee, it would not be the type of injury to competition Congress envisioned for the antitrust laws.

The article that quoted Mr. Ballmer provides a real-world example of what IBM was describing in legalese. The CNET News.com article, entitled "Microsoft looks to extinguish LAMP," says that the combination of Linux, Apache, MySQL, and scripting lanuages like PHP, Perl, and Python (LAMP), is eating Microsoft's lunch, or at leasting cutting into it, so Microsoft is planning to "heap features into its low-end products" and build a "comprehensive set of tools -- spanning development to management" to try to make their server more attractive. So, does that hurt consumers, or benefit them?

Do you see now what IBM's lawyers meant in their motion to dismiss Daniel Wallace's lawsuit regarding the GPL, when they pointed out that there was no antitrust injury, because competition from GPL code is *benefiting* the consumer, not damaging them, regardless of what it may or may not be doing to Wallace personally?

I'm sure Daniel Wallace will be relieved to hear that Microsoft has spelled out how well it can compete against a product that can be downloaded for free. Its senior vice president of server applications tells the world how in the same article:

Having products that are engineered to work together--something open-source competitors cannot do--will ultimately make Microsoft products easier to run and more cost-effective over time, said Paul Flessner, senior vice president of server applications.

"You can compete with an acquisition price of zero if, over the lifetime, you have a lower total cost of ownership. I think it will be very difficult for them to emulate, honestly, given their economic models," Flessner said. "I feel good about the low-end assault from freeware."

Memo to the court hearing Mr. Wallace's antitrust complaints: the chief "victim" of the GPL, according to Mr. Wallace, says it has no trouble competing with GPL products. Just so you know.

Of course, Mr. Flessner is wrong about open source being unable to make applications work together. But let's let him find out the hard way, shall we? Meanwhile, the headline says it all, to me. It is actually Microsoft trying to "extinguish" its competition. The LAMP stack doesn't care about competition and isn't trying to extinguish Microsoft. It's a by-product of some very fine code written by some mighty ethical people up against code from a company nobody much trusts any more. And after watching all the pro-Microsoft litigation, do we trust them more or less?

Speaking of consumers, I learned something about Microsoft's new low-end XP for the third world. You can only open three windows at a time. Can you imagine? And Wallace thinks GPL code is harming consumers? He should take a look at that. Why would anyone in the world choose that over a GNU/Linux system, which enables you to be the master of your own computer and do anything you like with the code, open anything, do anything, whatever you please, all the things everyone else in the world can do, with no mother-may-I?

This, of course is the piece Wallace can't fix about his complaint, no matter what stories he tells next. Consumers are benefitting. Period. And that does not an antitrust injury make. Here are the main cases that IBM, Red Hat and Novell cite and what they held:

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.:
"A private plaintiff seeking injunctive relief under 16 must show a threat of injury 'of the type the antitrust laws were designed to prevent and that flows from that which makes defendants' acts unlawful.'"

Atlantic Richfield Co. v. USA Petroleum Co.:

"USA's argument that, even if it was not harmed by any of the Albrecht anticompetitive effects, its lost business caused by ARCO's agreement lowering prices to above predatory levels constitutes antitrust injury is rejected, since cutting prices to increase business is often the essence of competition. . . .
"A loss flowing from a per se violation of 1 does not automatically satisfy the antitrust injury requirement, which is a distinct matter that must be shown independently. The purpose of per se analysis is to determine whether a particular restraint is unreasonable. Actions per se unlawful may nonetheless have some procompetitive effects, and private parties might suffer losses therefrom. The antitrust injury requirement, however, ensures that a plaintiff can recover only if the loss stems from a competition-reducing aspect or effect of the defendant's behavior."

State Oil v. Khan:

"Informed by the foregoing decisions and scholarship, and guided by the general view that the antitrust laws’ primary purpose is to protect interbrand competition . . . and that condemnation of practices resulting in lower consumer prices is disfavored . . . this Court finds it difficult to maintain that vertically-imposed maximum prices could harm consumers or competition to the extent necessary to justify their per se invalidation."

Cargill, Inc. v. Monfort of Colorado, Inc.:

"The proposed merger does not constitute a threat of antitrust injury. A showing, as in this case, of loss or damage due merely to increased competition does not constitute such injury."

Here's the Red Hat Novell Motion, followed by the Wallace proposed Amended Complaint [PDF].

*********************************************************

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION


DANIEL WALLACE,

Plaintiff,

v.

INTERNATIONAL BUSINESS MACHINES
CORPORATION,
RED HAT, INC.; and
NOVELL, INC.,

Defendant.



Case No. 1:05-cv-678-SEB-VSS



RED HAT, INC. AND NOVELL, INC.'S
MOTION TO DISMISS COMPLAINT

Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, Defendants Red Hat, Inc. and Novell, Inc., by counsel, move to dismiss the Complaint with prejudice for the reason that the Complaint fails to state a claim against Defendants upon which relief can be granted. With and in support of this Motion, Defendants Red Hat, Inc. and Novell, Inc. have filed a separate brief.



Respectfully submitted,

ICE MILLER

s/ Philip A. Whistler
Philip A. Whistler
[e-mail]
Curtis W. McCauley
[e-mail]
ICE MILLER
[address, phone]

Counsel for Defendants Red Hat, Inc., and
Novell, Inc.

1

CERTIFICATE OF SERVICE

The undersigned hereby certifies that on the 6th day of July, 2005, a copy of the foregoing was filed electronically. Notice of this filing will be sent to the following parties by operation of the Court's electronic filing system. Parties may access this filing through the Court's system.

Michael Gottschlich
[e-mail]
Kendall H. Millard
[e-mail]
BARNES & THORNBURG
A copy of the foregoing will be sent via first class mail to the following parties:
Daniel Wallace
[address]



s/ Philip A. Whistler
Philip A. Whistler

2

********************************************************************

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION


DANIEL WALLACE,

Plaintiff,

v.

INTERNATIONAL BUSINESS MACHINES
CORPORATION,
RED HAT, INC.; and
NOVELL, INC.,

Defendant.



Case No. 1:05-cv-678-SEB-VSS



BRIEF OF RED HAT, INC. AND NOVELL, INC.
IN SUPPORT OF MOTION TO DISMISS COMPLAINT

I.

PRELIMINARY STATEMENT

Defendants Red Hat, Inc. and Novell, Inc. join in the arguments presented by International Business Machines Corporation ("IBM") in support of its Motion to Dismiss the Complaint. Red Hat, Inc. and Novell, Inc. submit the following additional brief statement of reasons the Complaint should be dismissed with prejudice.

II.

ARGUMENT

A. The Complaint Fails to Allege a Violation of the Sherman Act.

The single substantive paragraph of the Complaint alleges that the Defendants have "conspired to promote a copyright licensing scheme employing the GNU General Public License to fix the prices of computer programs." Plaintiff goes on to allege that this "denies the Plaintiff

1

an opportunity to earn future revenues in the field of computer programming." (Emphasis added.) The relief requested is an injunction prohibiting the "promotion or use of Section 2(b) of the General Public License."

The General Public License ("GPL") which is the subject of the Complaint is part of the legal framework for what is commonly referred to as "free" or "open source" software. Licensees of computer programs that are licensed pursuant to the GPL are not charged for the license, but are required to license any derivative works that they create using the licensed software under the same terms and conditions, which include (a) making the source code freely available, and (b) not charging for the license. (See Exhibit A, attached.)

Section 2(b) of the GPL provides:

You must cause any work that you distribute or publish, that in whole or in part contains or is derived from the Program or any part thereof, to be licensed as a whole at no charge to all third parties under the terms of this License.

Thus, under Section 2(b) of the GPL, any licensee of "open source" or "free" software (a) is not charged for the license, (b) receives the source code and is free to improve the program and make derivative works from it, but (c) must in turn license any improvements or derivative works, at no charge, to all third parties under the same terms.

Construing Plaintiff's allegations in light of the actual terms of the GPL, and construing them most favorably to the Plaintiff, it is evident that Plaintiff has failed to allege a violation of the Sherman Act. The "agreement" that is alleged – Section 2(b) of the GPL – is, if anything, a vertical maximum price restraint, which after State Oil v. Khan, 522 U.S. 3 (1997), is to be evaluated under the Rule of Reason. Indeed, even before State Oil v. Khan, courts recognized that the unique attributes of intellectual property licenses made per se treatment of vertical price restraints in software licenses inappropriate. See LucasArts Entertainment Company v. Humongous Entertainment Company, 870 F. Supp. 285 (N.D. Cal. 1993) (granting summary

2

judgment against licensee who claimed that software license provision regulating resale prices for derivative works violated the Sherman Act).

Because Plaintiff has not alleged any per se violation, the alleged restraint must be judged under the Rule of Reason. Spanish Broadcasting System of Florida, Inc. v. Clear Channel Communications, Inc., 376 F.3d 1065, 1071 (11th Cir. 2004). In cases subject to the Rule of Reason, anticompetitive effects in a relevant market must be specifically alleged. Here, Plaintiff conspicuously fails to allege any effect on anyone other than himself. This failure to allege an effect on competition requires dismissal of the Complaint.

In Car Carriers, Inc. v. Ford Motor Company, 745 F.2d 1101 (7th Cir. 1984), the Seventh Circuit upheld the dismissal of a complaint under Rule 12(b)(6) on the basis that the plaintiff had not alleged an anticompetitive effect:

The fatal flaw in these pleadings is the absence of any allegation, either direct or inferential, of an anticompetitive effect. . . . As the Supreme Court has aptly stated, the antitrust laws were designed to protect competition, not merely competitors.
Id. at 1109.

In short, Plaintiff has failed to allege a per se violation of the Sherman Act, nor has he alleged facts showing injury to competition in a relevant market to state a claim under the Rule of Reason. The Complaint should therefore be dismissed.

B. Plaintiff Has Failed to Allege Antitrust Injury or Plaintiff's Standing to Sue.

The allegations of the Complaint also show that Plaintiff lacks standing to sue because he has suffered no "antitrust injury." This is a separate, and sufficient, basis on which to dismiss the Complaint.

The Supreme Court first articulated in the case of Brunswick Corp. v. Pueblo Bowl-o-Mat, Inc., 429 U.S. 477 (1977), the requirement that a plaintiff suing under the Clayton Act establish "antitrust injury." In Brunswick, the plaintiffs were independent bowling alley

3

operators who alleged that they had been injured by the defendant's unlawful acquisition of failing bowling centers in their neighborhoods. Plaintiffs alleged that if the centers had been allowed to fail, or had been acquired by a less well-financed competitor, the plaintiffs would have been subject to less competition, and would therefore have made greater profits. The Supreme Court, in reversing a judgment in favor of the plaintiffs, explained that a plaintiff who alleges injury by reason of a violation of the Sherman Act must allege more than mere "but for" causation. Such a plaintiff must allege injury that flows directly from the anticompetitive aspect of the challenged activity. The Court reiterated that because the antitrust laws were created for the protection of competition, not individual competitors, a plaintiff does not state a claim under the Sherman Act when he merely complains that increased marketplace competition has diminished his revenues.

The Supreme Court has reaffirmed and extended the holding of Brunswick in subsequent cases that are dispositive here.

First, in Atlantic Richfield Companies v. USA Petroleum Company, 495 U.S. 328 (1990), the Court held that a competitor who alleged that he lost profits due to his competitor's vertical maximum price fixing scheme lacked standing to sue under the antitrust laws. A review of the terms of the GPL, specifically Section 2(b), discloses that this is precisely the situation alleged by this Complaint. Atlantic Richfield establishes that Plaintiff has no standing to bring this Complaint, even if the alleged vertical maximum price fixing agreement were per se unlawful, which after State Oil v. Khan it plainly is not.

The fact that Plaintiff seeks only injunctive relief, rather than damages, does not save the Complaint from dismissal. In Cargill, Inc. v. Monfort of Colorado, 479 U.S. 104 (1986), the court held that antitrust injury requirement applies equally to plaintiffs seeking injunctive relief under Section 16 of the Clayton Act.

4

In short, under State Oil v. Khan, Plaintiff has not alleged a substantive violation of the Sherman Act. Moreover, under the Brunswick, Richfield, and Cargill cases, Plaintiff has not alleged any actual or threatened "antitrust injury" of the sort that would give him standing to sue.

Therefore, even if Plaintiff had stated the elements of an antitrust violation – which he has not – the Complaint should still be dismissed.

III.

CONCLUSION

For all the foregoing reasons, as well as all the reasons cited in the brief filed by IBM, the Complaint should be dismissed with prejudice.



Respectfully submitted,

ICE MILLER

s/ Philip A. Whistler
Philip A. Whistler
[e-mail]
Curtis W. McCauley
[e-mail]
ICE MILLER
[address, phone]

Counsel for Defendants Red Hat, Inc., and
Novell, Inc.

5

CERTIFICATE OF SERVICE

The undersigned hereby certifies that on the 6th day of July, 2005, a copy of the foregoing was filed electronically. Notice of this filing will be sent to the following parties by operation of the Court's electronic filing system. Parties may access this filing through the Court's system.

Michael Gottschlich
[e-mail]
Kendall H. Millard
[e-mail]
BARNES & THORNBURG
A copy of the foregoing will be sent via first class mail to the following parties:
Daniel Wallace
[address]



s/ Philip A. Whistler
Philip A. Whistler

6

********************************************************************

UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF INDIANA

INDIANAPOLIS DIVISION

Daniel Wallace,

Plaintiff,

v.

INTERNATIONAL BUSINESS MACHINES CORPORATION;
RED HAT INC.;
NOVELL, INC.,

Defendants.

Civil Complaint No. 1:05-cv-0678-SEB-VSS

Amended Complaint

JURISDICTION

This Court has federal jurisdiction pursuant to 28 U.S.C. sec. 1337(a).

STANDING

Plaintiff Daniel Wallace has standing for commencement of this action pursuant to 15 U.S.C. sec. 26.

PARTIES

Plaintiff Daniel Wallace is a citizen and resident of Hancock County in the State of Indiana.

Defendant INTERNATIONAL BUSINESS MACHINES CORPORATION is a New York corporation with business headquarters in the State of New York.

Defendant RED HAT INC. is a Delaware corporation with business headquarters in the State of Utah.

VENUE

Venue for this action is established pursuant to 15 U.S.C. Section 15(a) and supplemented by 28 U.S.C. Section 1391 (a)(2).

COMPLAINT

The Defendants INTERNATIONAL BUSINESS MACHINES CORPORATION, RED HAT INC. and NOVELL INC. have conspired with the FREE SOFTWARE FOUNDATION INC. and others to fix the price of intellectual property in computer programs that are collectively known as the Linux (or GNU/Linux) operating system.

The Defendants have conspired by using a price-fixing agreement known as the GNU GENERAL PUBLIC LICENSE to develop, distribute and leverage the Linux operating system to provide computing services for consumers.

The Defendants' per se horizontal price-fixing scheme is rapidly foreclosing competition in the market for computer operating systems. Said price-fixing scheme threatens to prevent Plaintiff Daniel Wallace from entering into the free market with his own computer operating system.

REQUEST FOR RELIEF

The Plaintiff respectfully requests the Court grant equitable relief in the form of an injunction prohibiting the development and distribution of the Linux operating systtem under GNU GENERAL PUBLIC LICENSE in the course of commerce by the defendants INTERNATIONAL BUSINESS MACHINES CORPORATION, RED HAT INC. and NOVELL INC.

Dated this 5th day of July, 2005.

__[signature]___
Daniel Wallace, pro se
[address]


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