So technically the code is Open Source but each distributor must get a patent license... that is restricted to redistributing binary form only.
(I deliberately did avoid the use of the word Free Software, as this actually might not be true if the code is licensed under the Free Software license GPL).
"Free Software" vs "Open Source" would not be relevant here, since both FS and OS would view this "you-still-need-a-patent-licence" clause as incompatible with FS & OS.
There are a few bits in the new GPLv3 that say "if you release under GPLv3 then you have to give everyone a patent licence". However I don't know how that works if you don't have a full patent licence…
There are existing open source implementations of H264. Even the best encoder (x264) is open source. But I guess there are license issues with third party code/libraries used in Flash.
It's a shame that a complete clean room open source implementation (e.g. x264) might still be illegal to use in some territories.