Is what they are doing legal?
It certainly seems that way. The phrase "open source" is just a pair of words. Anyone can use the phrase to refer to some kind of "source" that is "open" in some respect.
The Open Source Initiative wrote the Open Source Definition (OSD), which is what most people mean when they say "open source". However, "open source" is not a trademark, and is probably ineligible for trademark status, according to Eric S. Raymond:
We have discovered that there is virtually no chance that the U.S. Patent and Trademark Office would register the mark "open source"; the mark is too descriptive. Ironically, we were partly a victim of our own success in bringing the "open source" concept into the mainstream.
So "Open Source" is not and cannot become a trademark...
Thus, there's no legal impediment to using the phrase "open source" to mean a wide range of different things.
The practice of giving away the source but without allowing redistribution or modification is what the Open Source Initiative might call "source available," but again, there's nothing legally wrong with using "open source" to mean something other than "complying with the Open Source Definition." However, if you wish to make yourself clearly understood within the FLOSS community, please use "open source" and "source available" appropriately. Obviously, these companies are not interested in making themselves clearly understood within the FLOSS community; they are interested in making sales.
Finally, requiring payment to get a copy of the software is perfectly in line with the values of the Free Software Foundation and the Open Source Initiative. However, OSD-compliant software would allow you to freely use, modify, and redistribute the software once you paid for it, which these software products do not allow.
