Arm Squares Off Against Qualcomm: Day 1

Despite all the public disclosures that have been made prior to this case ever seeing the inside of a courtroom, there is no substitute to the amount of information presented once the gavel hits the bench. This was the case during the first day of the trial between Arm and Qualcomm. Listening to the two companies made it seem at times like the two companies were talking about completely different cases while still referencing the same contractual documentation. While this was only the first day of what is scheduled to be four to five days of testimony, many questions were answered. However, as is often the case, answers begat more questions.

Opening Statements

Day one started with opening statements by both companies, which was like a trial within a trial. Arm made the argument that it gave startup Nuvia a lower upfront license fee with a higher royalty rate to help the company get started in its development efforts but was granted the opportunity to approve any acquisition and with the understanding that the acquirer would be required to negotiate a new architecture license.

According to Arm, Nuvia and Qualcomm failed to notify Arm of the acquisition. Arm also claims that Qualcomm acquired Nuvia to save money through the use of an Architecture License Agreement (ALA) over the higher cost of licensing standard Arm cores through a Technology License Agreement (TLA).

After the acquisition, Arm claims that it was in discussions with Qualcomm to transfer the Nuvia design, but only if Qualcomm agreed to the royalty terms of the Nuvia license agreement. According to Arm, Qualcomm declined but continued to use the Nuvia technology without a license.

According to Qualcomm, it was struggling to compete with Apple because the Arm CPU cores were not competitive, forcing it to begin designing its own CPU cores once again, which led to the Nuvia acquisition. Qualcomm claims that it had the right to use the Nuvia technology under its own ALA agreement and that Arm sought to disrupt the use of the Nuvia technology in an effort to charge Qualcomm higher royalty rates.

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Both companies had opposing opinions on the importance of the Arm Instruction Set Architecture (ISA) Reference Manual with Arm calling it copyright-protected and critical to any compliant processor design and Qualcomm referring to it as an open-sourced solution that anyone can download and more of a guide for software, than the design of a processor microarchitecture.

Expert Testimony

Following the opening statements, Arm called three expert witnesses:

• William Abbey, Arm Executive Vice President and Chief Commercial Officer
• Paul Williamson, Arm Senior Vice President and General Manager of the IoT Business
• Rene Haas, Arm Chief Executive Officer

Each witness was questioned by the Arm attorneys and cross-examined by the Qualcomm attorneys. While this was just the beginning of the trial, there were a significant amount of material facts that came to light through testimony, documents, emails, text messages, and letters within and between the companies since 2021. The following are some of the more impactful facts that provided a deeper insight than was previously available prior to the trial:

• While Arm was not informed of the Nuvia acquisition, it knew that an acquisition was likely by Qualcomm, Microsoft, or Nvidia.
• Arm was concerned about a Qualcomm acquisition because of the potential impact on licensing revenues from one of its largest licensees and sought to have Qualcomm adopt the Nuvia ALA royalty rates. Arm initially estimated the loss at around $50m.
• Arm did notify Qualcomm of the conditions of the Nuvia contract, and Qualcomm requested a transfer of the design.
• The two companies continued to negotiate for eight months trying to reach an agreement on the use of the Nuvia technology. Among the suggestions by Arm was not letting the Nuvia engineers work on Arm designs for three years or a proposed $135m license assignment fee to maintain Qualcomm’s existing ALA royalties for mobile applications using the Nuvia technology, but charging the higher Nuvia ALA royalty rates for PCs, automotive, and data center applications.
• After eight months, both companies let the negotiations lapse and discontinued communication until Arm notified Qualcomm of the intent to terminate the Nuvia license, which was followed by the termination notice and lawsuit.
• Once the Nuvia license was terminated, Arm not only informed Qualcomm of the termination, but also 37 current and potential Qualcomm customers, which it deemed necessary, but Qualcomm viewed as aggressive and misleading based on inaccurate statements.

It was clear that as negotiations progressed the relationship became caustic. At one point, it came to light through testimony that Arm CEO Rene Haas referred to Qualcomm as “the enemy” out of frustration. This came after decades of working closely together and both companies benefitting from the success of new markets like smartphones and the proliferation of the Arm ecosystem.

Key insights

The true insights came when digging into the details and terminology of the Nuvia and Qualcomm contracts. One of the key points that came out of today’s testimony is that Arm had the right to approve any transfer of the license, but Qualcomm requested a transfer of the Nuvia IP in the form the the Nuvia design, referred to as the “Phoenix” CPU core. As a result, Qualcomm did not argue with the termination of the Nuvia license.

According to Arm, it is common for Arm to approve the transfer of designs with acquisitions as long as the acquirer negotiates the appropriate Arm license, and the ALA does not appear to put any limitations on the transfer of designs. In this case, Qualcomm already had an ALA license that includes the upcoming Arm V9 architecture and does not expire until 2028, but Qualcomm has the option to extend it to 2033 for an additional fee of $1m/year. In one review of the Qualcomm contract, it was referred to by Arm as “bomb proof” – meaning that there is no way to nullify or negate the terms of the contract. However, Arm sought to modify the existing license and/or negotiate a new one for higher royalty rates.

More to Come

It is important to note that the trial time is limited to 22 hours and there is still much more expert testimony to come. The observations herein are my own and have no bearing on the eventual outcome of the case. That is for the jury to decide and with the flood of information and differing perspectives, it is impossible to determine what that will be at this time. However, it is helpful to keep in mind that, based on a review of the jury instructions, ultimately, the key contention is whether there was a breach of the Nuvia ALA license and in what manner it was breached. Stay tuned for day 2!

Disclosure: The author and members of the Tirias Research staff do not hold equity positions in any of the companies mentioned. Tirias Research tracks and consults for companies throughout the electronics ecosystem from semiconductors to systems and sensors to the cloud. Tirias Research staff have consulted for Apple, Arm, Nuvia, Qualcomm, and companies throughout the semiconductor and electronics ecosystems.