https://www.cursor.com/how-to-install-extension
Which is basically an article to use an extension in a way that’s basically forbidden use.
If that was not bad enough the editor also told you to install certain extensions if certain file extensions were used that were also against the tos of the extension.
And basically cursor can just be using the vsix marketplace from eclipse, which does not contain restricted extensions.
What they do is at least shady.
And yes I’m not a fan of the fact that Microsoft does this, even worse they closed the source (or some parts of it) of some extensions as well, which is also a bad move (but their right)
(You should keep this in mind next time someone tells you that VSCode is "open source", by the way. The core IDE is, sure, but if you need to do e.g. Python or C++, the official Microsoft extensions involved all have these kinds of clauses in them.)
I just don't have a problem with people "violating" Terms of Service or End User License Agreements and am not really convinced there's a legal argument there either.
For distribution licenses, I would assume they have. Can't put GPL software in your closed source code, can't just download Photoshop and copy it and give it out, etc. And that makes sense and you have some reasonable path to damage/penalties (GPL → your software is now open source, Photoshop → fines or whatever)
But if you download some free piece of software and use it with some other piece of free piece software even though they say "please don't" in the EULA, what could the criminal or civil penalties possibly be?