Qualcomm vs. Arm – Short but Sharp

I still think the dispute will settle.

• The dispute has gone to trial with both sides scoring points, but the outcome remains pretty uncertain where the outcome of this trial is likely to form the basis of a settlement.
• Much of the detail of this legal fight is fairly confusing but it essentially boils down to a fight over royalty rates.
• However, even this is confusing because Arm has not asked for a remedy that involves money but is only requesting that Qualcomm be forced to destroy products that are based on the technology it acquired from Nuvia.
• In Arm’s opinion, this means everything that uses the Orion custom processor, but seeing as the X series of laptop processors, Cockpit Elite, Ride Elite and 8 Elite processors were all developed at Qualcomm after the acquisition had closed, it follows that these chip designs should not be covered under such an order.
• It is these disagreements over what the contract between the two companies means is what this case is supposed to resolve.
• Once that is determined, there will be further legal wrangling over how the finding should be implemented.
• The case will be short as each side has a very limited amount of court time to put their case and so it is likely that the jury will retire before the end of the week with a verdict shortly after.
• An exchange that characterises the nature of this case occurred when Arm’s lawyers questioned Qualcomm’s chip designer Gerard Williams.
• Mr. Williams repeatedly stated that the contract did not mean that all of Nuvia’s work was a derivative or modification of Arm’s technology and that only around 1% of the IP in Nuvia’s chips met that definition.
• Arm’s lawyer immediately countered with “Maybe you wouldn’t say that, but that’s what the contract says”, to which Mr Williams responded, “I wouldn’t say that, but I am not a legal expert”.
• It was at this point that Arm’s lawyer wrapped up her questions.
• It is perfectly clear to any reasonable observer that only a proportion of a product built using Arm’s instruction set is Arm IP, but the problem appears to be that it is not hard to infer from the contract that the opposite is true.
• If this were the case, then one would expect that all of the products made using Arm would be fairly similar (like AMD’s version of x86) rather than the huge range of specifications and differences observable in the Arm ecosystem today.
• It is this that the court will decide and here, the outcome is very uncertain.
• Whichever way this goes, the immediate result is likely to be an appeal, but I am hopeful that the verdict will establish a position from which a settlement can be reached.
• This is in the best interest of the Arm ecosystem as Qualcomm is one of its biggest participants and I think that both companies would be best served by working together to take share in new markets such as PCs, Automotive and Cloud rather than fighting each other.
• Qualcomm is clearly quite confident of victory as this is not the first time that it has been to court to fight over IP and so it has far more experience in judging legal cases of this nature than Arm does.
• However, at the same time, this is an unusual case for Qualcomm, so despite its large experience advantage, I am far from certain which way this will go.
• I think it extremely unlikely that Arm will be able to force Qualcomm to destroy its IP and it is not in Arm’s long-term interest to do so, meaning that this remedy looks to me like a negotiating tactic to extract higher royalties and set a precedent for the rest of the industry.
• The most likely outcome is one where Qualcomm pays higher rates for its Orion processors to Arm but less than it would have done under the Nuvia licence.
• Either way, Qualcomm’s processors are here to stay meaning that the diversification strategy outside of smartphones remains intact and with it, the investment case.
• If Qualcomm’s shares crash after a loss, this would be a good opportunity to have another look at the stock for those who missed it when it was around $100 per share.