Who's doing this? VS Code is free; Pylance is free, cppdbg is free, the C# suite is free. However the licences are clear; these extensions are closed source.
VS Code's core editor functionality (Monaco, LSP, DAP, etc) is fully open, and has been regularly repurposed and re-branded by several other companies. I sincerely don't see the problem. If someone else wants to write their own extensions, they are free to; these extensions are Microsoft's IP and hence Microsoft is free to do what it wants with its IP.
https://github.com/microsoft/vscode-cpptools?tab=License-1-o...
In reality, it's a MIT-licensed wrapper. The real license is also included in the repository, just not the top level github license.
https://github.com/microsoft/vscode-cpptools/blob/main/Runti...
The disingenuity is what you are condoning. The repo is superficially organized to appear open-source but is actually a minefield.
Github will sometimes say "found other licenses"; the best Github can do is to "report" on the state of a repository; it's up to the community to decide on stricter tolerances for declaring something to be open-source, because as we see here, even a major corporation is willing to engage in subterfuge/exploitation.
Saying something is "open source" provides material benefit: it creates attention, it attracts users, it creates community. Shouldn't a project be fully in-the-spirit of open source to benefit?
There's plenty of case law around the word "free"; it's just too early for the phrase "open source" to have settled case law.