Arm v. Qualcomm

Yesterday Arm sued Qualcomm in US Federal Court. We are not lawyers, but we read the suit, and a lot of the press coverage around it. And we were left with a fundamental question – what could Arm possibly be thinking. This is a big move, and regardless of the legal outcome, the optics of the suit are going to be very challenging, and could very easily end up with a situation where they win the battle but lose the war.

The case centers on Qualcomm’s acquisition of privately-held Nuvia for $1.4 billion last year. Nuvia was designing a CPU for servers based on Arm’s IP. Arm alleges that when Qualcomm acquired Nuvia they did not acquire the rights to the Arm content in Nuvia’s design. And as such, Nuvia’s products infringe on Arm’s patents and trademarks. Qualcomm has not filed its own motions yet, but their General Counsel commented to the press that basically Qualcomm already has a license with Arm which covers its subsidiaries, including Nuvia. Without getting into detail, we can say that this is not the first time the two companies have butted heads on the subject of Arm licenses for Qualcomm subsidiaries.

And while we have no basis for even making a guess as to how the courts will rule on this, we see a few potential big problems for Arm from taking this approach.

First, does Arm really want to air its laundry – clean or dirty – in a public hearing? At the very least, it seems likely that Arm’s royalty rates for both Qualcomm and Nuvia will come out in discovery, and that seems likely to open a kettle of problems with Arm’s other licensees.

Second, we have to wonder what signal this sends to any start-up thinking about signing an Arm license. As we have noted repeatedly in the past, Arm has struggled in recent years with its pricing models for start-ups. Now add to the mix that any start-up has to wonder if after years of work, they risk their ultimate exit and sale of their company because of that license they are signing today.

Third, the timing of this is not great. Qualcomm has generated tremendous public momentum and interest in Nuvia’s products. Those are set to start sampling over the next year, and a lot of people/customers are waiting with tremendous interest to see what they deliver. Now the press is going to turn every press release and customer announcement into an opportunity to revisit the lawsuit. That is not great for Qualcomm, but it is bad for Arm too. Arm should be basking in the fact that one of their licensees is bringing the Arm instruction set to new markets and new products. A big part of the complaint deals with use of Arm trademarks in Qualcomm’s and Nuvia’s marketing of the new chips. Which again, you would think Arm would really like to benefit from. The irony in that is if you read much of what Qualcomm and many other companies say about their Arm-based chips, none of them mention Arm. Qualcomm’s press release when it purchased Nuvia mentions Arm exactly zero times. Amazon’s web page for its Arm-based Graviton CPU only mentions Arm in comments from software partners. AWS itself hardly ever gives credit to Arm.

Finally, the biggest problem is that regardless of the intent or outcome of this suit, every Arm licensee or potential Arm licensee is tomorrow going to accelerate their development of RISC V work. Suing one of your biggest licensee is a bad look when there is a new entrant like RISC V looming on the horizon.

In their defense, Arm has a lot of smart people. Selling IP is a tough business and does occasionally require calling in the lawyers. We thought of a whole list of possible reasons why Arm decided to go down this path. These run the gamut: from a rogue employee getting ahead of themselves (not the first time this has happened, but highly unlikely); to some sort of signal to investors in a future public Arm that they are not afraid to get tough defending their turf (counter-productive and also unlikely); to lingering bad feelings from all the work Qualcomm did behind the scenes to sink Nvidia’s Arm acquisition (this is business, not personal). And since this is Qualcomm, we cannot entirely rule out the possibility that Arm has been encouraged to do this by some third party hovering in the shadows (again, not the first time we have seen that).

That being said, we think that in the end this just boils down to a dispute over royalty rates. Qualcomm thinks it should pay one rate, Arm has a higher number in mind. And now that negotiation has been exhausted they turn to the courts. It is even possible that Arm is just pre-empting a suit they expect from Qualcomm. And not for nothing, it is worth keeping in mind that there are press reports that Qualcomm is looking to revise Nuvia’s ambitions to produce a data center CPU. We continue to think it is highly unlikely that Qualcomm really wants to get back into that market, but it also looks a lot like Qualcomm would like to unload the designs for that almost-completed chip to someone else. And so it is easy to see a big knot in that process when it comes to Nuvia’s Arm license.

Ultimately, this seems almost certain to get settled long before it gets put in front of a jury (although maybe not ahead of Nuvia’s product launches). And we respect Arm’s right to defend its IP. However, it is also hard to argue that this is not going to create some significant marketing problems for Arm at a really bad time.

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