Arm Was All Bark, No Bite in Battle with Qualcomm (Premium)

10 days ago, Arm v. Qualcomm ended in a resounding victory for Qualcomm, with a jury determining that the chip making giant did not violate the terms of its licensing agreement with Arm Holdings. On the opening day of the trial, I described the events that led up to this pointless legal drama. Here, I will try to clear up some misconceptions about this dispute.

There were plenty of opinions based on very little information heading into the trial, and there still are now. What we couldn’t know from the outside was the language of the licensing agreements that Arm Holdings reached, separately, with Nuvia and Qualcomm, agreements that still bind Arm and Qualcomm together. I was hoping for clarity on this during the trial. And while the full details of their arrangement were kept mostly private, one clause revealed in court says it all. Qualcomm’s agreement with Arm clearly states that the license covers “work done by itself and others.”

Also notable, while both companies were publicly trying to sound as confident as possible heading into the trial, only Arm based its future financial guidance on the assumption that it would lose in court and never see a revenue windfall. Qualcomm never changed its forecast. And that, to me, was an important point. Arm is only recently a publicly held company, it has yet to crack the $1 billion quarterly revenue ceiling, and investors are already getting edgy because it’s a non-player in AI. Qualcomm, meanwhile, is an economic superpower, with over 10 times the revenues of Arm, an impressive and growing array of chips that target ever conceivable market, and strong AI credentials.

And then there’s the Softbank issue.

Softbank is Arm’s parent company, and it has been pressuring the firm to raise revenues by increasing its licensing fees. When Arm resisted, there was a leadership change. And the current leadership has been uniquely aggressive in trying to capitalize on Qualcomm’s Nuvia acquisition.

The more you know

But the more I learn about the dispute behind Arm v. Qualcomm, the more I believe that it may be time for another change in leadership at Arm. This feud was worse than pointless, and it was a big blow to Arm’s credibility at a time when it is trying to expand its offerings to partners. What Qualcomm demonstrated in court was that it doesn’t really need Arm or any new chip designs from the company, and that the Arm designs that remain at the heart of its chips are almost vestigial in nature: Qualcomm is now actively moving past Arm’s processor core designs.

This could be Arm’s Achilles Heel. It does design the basis of the chips that power the world’s computing devices across the stack, but its most influential and popular licensees–like Apple and Qualcomm–long ago veered off from Arm’s work and created chips that are their own. That Apple and Qualcomm are also partners and competitors is interesting on some level. But the two are more similar than the former will ever admit.

Like Qualcomm, Apple designs its own chips using Arm designs. And as with Qualcomm, those chips are increasingly unique, diverging wildly from the designs they were initially based on. Apple markets this, as it should, as a strength and differentiator. The more Apple these chips are, the better it is for Apple, and, the company points out, the better its products are.

This is good for Arm on some level. But it’s also bad: Apple needed Arm to get its in-house chips off the ground. But Apple doesn’t really need Arm now. Apple isn’t eagerly anticipating some future generation Arm designs. It’s moved on, like Qualcomm is. And it is expanding into new types of chips–infamously, cellular connectivity, but also chips for Wi-Fi and Bluetooth–and always with the same purpose. To rid itself of having to rely on another company for core technologies that it wants to bring in-house so it can customize them to its needs. There are strong parallels between Apple working to rid itself of its reliance on Arm and Qualcomm, and Qualcomm working to rid itself of its reliance on Arm Holdings.

For all the obvious reasons, Arm–really, Softbank, wants more. It wants more revenues, a bigger percentage of the pie.

Like Qualcomm, Arm has taken its core chip designs and expanded them to include chips that are specialized for specific use cases, including, go figure, the PC. This more expansive design portfolio is part of what Arm calls its Arm v9 series. And those chip designs are much more expensive to license than the previous generation designs. Arm wants licensees to need these designs, to drop their use of Arm v8 and move to Arm v9. Many will, but the biggest companies–like Apple and Qualcomm–moved on so long ago and are so advanced in their own custom chips, that this is a moot point.

I saw little in the way of daily news posts from the trial. But I’ve since found three analysts who covered the trial in person that week, at least one of whom, Prakash Sangam, took copious notes. These notes are invaluable to understanding what really happened. (The other two are Mike Feibus and Jim McGregor.)

The claims

Arm Holdings told the court that Qualcomm acquired Nuvia to save on licensing costs. Qualcomm licenses what’s called Arm v8, which is cheaper to license than Arm’s newer v9 designs. I assume it also gets what amounts to a volume discount thanks to the size and scope of its operations. But Nuvia received an even deeper discount, Arm claimed, because it expected the firm to be acquired at some point. Arm’s contract clearly states that Nuvia required Arm’s approval to assign its discounted license to another company.

Qualcomm told the court that it acquired Nuvia because Arm’s designs didn’t deliver the performance it needed, and that its licensing agreement with Arm covers the Nuvia designs. Qualcomm paid about $1.4 billion in licensing fees to Arm in the past year.

Arm tried to negotiate with Qualcomm, seeking higher licensing fees: In its view, Qualcomm was legally required to pay both sets of licensing fees. But Qualcomm revealed that Arm wanted up to 4 times the fees it was collecting from Qualcomm. (It currently pays a licensing fee of 1.1 percent, where Arm now wants 5.3 percent.) And Arm made untenable demands, Qualcomm testified, like requiring that former Nuvia engineers not work on new chip designs at Qualcomm for three years.

Intriguingly, Qualcomm also entered into the court record many internal communications related to the change in Arm management and leadership that led to a more aggressive licensing campaign against licensees and, ultimately, the lawsuit. The claim here is that Arm’s previous leadership would never have attacked an important partner like Qualcomm this way. Arm CEO Rene Haas admitted on the stand that he did not agree with his predecessor’s approach of “finding the middle ground” with Qualcomm, and that Arm parent Softbank was pressuring him to earn more licensing revenues.

The two sides presented contradictory testimony in some cases. For example, Qualcomm said that Nuvia cancelled its Arm license, while Arm says it did. An Arm executive–Will Abbey–literally claimed that he didn’t prepare for his earlier deposition and that giving testimony “triggered” more memories of these events, a bad look given that his deposition was much closer in time to the events it regarded.

He said, he said

There was also some outright nonsense.

Mr. Haas said that Arm had considered making its own processors, which would make it a competitor to its partners. He added that these chips would “blow away” the products its customers now make. This is also not a good look.

Qualcomm CEO Cristiano Amon testified that Samsung Mobile president TM Roh was told by Arm and Softbank that Qualcomm’s Arm license expires in 2025, and he was worried about getting enough chips for his company’s phones and other devices. But Qualcomm’s license doesn’t expire until 2028, and it has an option to extend that to 2033. So Arm and Softbank literally lied to Samsung.

While we can’t know the full language of the licensing agreements that Arm has with Qualcomm and others, one other bit that came out is that Arm’s stance is that the designs of all Arm chips are derivative of its designs. As such, it argues, they are in effect Arm’s designs. For the companies that innovate on top of Arm’s designs–Apple and Qualcomm, most notably, but also many others–that’s not just an affront, it’s nonsense.

To make the point, Arm used a piano analogy throughout the trial, arguing that any piano keyboard is a piano keyboard, no matter how big it is. Qualcomm retorted that no one who designed a keyboard would claim to own all the pianos in the world. More specifically, Mr. Amon and multiple expert witnesses explained that Qualcomm’s processor cores are not legally or technically derived from Arm’s designs anyway. Given this, Arm’s demand that Qualcomm “destroy” all its Nuvia-based work is doubly absurd.

The decision

As I noted in Qualcomm Defeats Arm in Court (Updated), the judge in the case required the jury to assess three questions, and explained that each decision would have to be unanimous. Did Nuvia breach the terms of its Arm licensing agreements? Did Qualcomm breach the terms of its Arm licensing agreements? And are Qualcomm products built using Nuvia technology covered by the terms of Qualcomm’s Arm licensing agreements.

After 10 hours of deliberation, the jury answered no to the first question and yes to the second and third questions.

Those who back Arm in this battle believe the unanswered first question is grounds to continue the fight. But this question is misunderstood. According to its closing statements, Arm’s concerns with Nuvia were twofold. First, that the company required Arm’s permission to be acquired, a position that was contradicted earlier in court. And second, that Nuvia violated a confidentiality clause by disclosing its Arm licensing fees to Qualcomm. But this immaterial, and Qualcomm cannot be held responsible for this disclosure. The jury was given additional time to consider this question after they revealed they were deadlocked, but to no avail.

Meanwhile, Qualcomm highlighted multiple instances of harassment on Arm’s part, behavior that seems odd given the importance of their relationship and the ramifications to Arm’s other licensees. In addition to lying to Samsung, Arm sent letters to 40 Qualcomm customers claiming that it had violated its licensing agreements in a bid to undermine the company and its products. This wasn’t really about the license, Qualcomm argued, it was about Arm trying to raise its revenues through charging higher fees.

Retrial?

Arm said that it would seek a retrial. But that is nonsense.

For starters, the judge explicitly told the court that she did not want to see either company again and that, should Arm seek a retrial, she would require both companies to undergo mediation first. “That makes this case a sure win for Qualcomm,” Mr. Sangam wrote. “[The judge] thought the case should have been settled instead of coming to trial.”

Whether Nuvia violated its licensing agreement with Arm is legally moot. Nuvia hasn’t existed as a standalone entity since it was acquired by Qualcomm, an event that terminated its agreement with Arm (whichever side is really responsible). So there’s nothing to retry here. Qualcomm purchased Nuvia “as-is,” so to speak, and, as noted, it cannot be held responsible for whatever disclosures it made before the acquisition.

A few quotes from those who attended the trial in-person.

“[It’s] shameful that Arm was willing to take down its customer and partner over this,” Mr. Feibus wrote. “Shameful.”

“Arm loses its leverage to push for a new [license agreement] with Qualcomm and faces lower royalties from its largest customer as Qualcomm rolls out its new line of custom CPU cores throughout its product lines,” Mr. McGregor wrote in Forbes. “This may be a wake-up call for the rest of the Arm ecosystem as it considers taking new Arm licenses and/or acquisitions.”

“Qualcomm kept its impressive streak of winning major court trials,” Mr. Sangam added. “Recently, it won against FTC, won one, and settled another case against Apple, and now against Arm (actually SoftBank, which owns 90% of Arm).”