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Since it's a more restrictive license, they can't merge back the changes.

Can't they? They're given the option to take the upstream code under the AGPLv3, so if they take the code as AGPLv3, they can incorporate their changes since AGPL and GPL are compatible.

Well, yeah. I'd never really thought about it before, but linus was really prescient in not adopting the or-later clause. This sort of thing would be destructive to linux.

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