In the first reported U.S. case to address, albeit indirectly, the validity of open source licenses, the United States Court of Appeals for the Seventh Circuit held in Wallace v. International Business Machines Corp., 2006 U.S. App. LEXIS 27699 (Nov. 9, 2006), that the GNU General Public License ("GPL") does not violate federal antitrust laws.

The plaintiff, Daniel Wallace, wanted to compete with Linux by offering a derivative work of the Linux operating system or by writing an operating system from scratch. The essence of his argument was that IBM, Red Hat, Novell and others had engaged in a "conspiracy" to keep the price of open source software at zero, thereby giving Wallace no room to compete on the basis of price.

The Seventh Circuit made short shrift of Wallace's argument, holding that while the federal antitrust laws prohibit parties from conspiring to raise prices, they do not prohibit agreements to lower prices to the benefit of consumers. The only exception to this rule is where the price setters enjoy such a large market share or pose such a threat to consumers' welfare in the long run that the practice constitutes predatory pricing. Predatory pricing occurs when low prices are followed by the exit of producers who can no longer make a profit, which is in turn followed by monopoly (increased) prices.

In this case, the court held that due to the number of players in the open source market, there was no danger of predatory pricing. According to the court, applying antitrust law to squelch open source software "would turn the Sherman Act on its head." Id. at *5. The court