(Bloomberg) — Arm Holdings Plc (ARM) is terminating a license that longtime partner Qualcomm Inc. (QCOM) allowed Arm to use intellectual property to design chips, raising legal disputes over vital smartphone technology.
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Arm, based in the UK, gave Qualcomm a binding 60-day notice to terminate their so-called architectural license agreement, according to a document seen by Bloomberg. The deal allows Qualcomm to build its own chips based on Arm's proprietary standards.
The showdown threatens to destroy the smartphone and personal computer markets, as well as disrupt the finances and operations of two of the semiconductor industry's most influential companies.
Qualcomm shares fell nearly 5% in premarket trading on Wednesday after closing at $173.18 in New York on Tuesday. Arm fell about 1.1% before the U.S. market open after earlier closing at $152.58.
Qualcomm sells tens of millions of processors annually — the technology used in most Android smartphones. If the cancellation takes effect, the company could have to stop selling products that account for most of its roughly $39 billion in revenue, or face claims for massive damages.
Arm began a legal battle in 2022 when it sued San Diego-based Qualcomm — one of its biggest customers — for breach of contract and trademark infringement. To resolve disputes.
Arm representatives declined to comment. A Qualcomm spokesman said the British company was trying to “strengthen a long-standing partner”.
It “appears to be an attempt to disrupt the legal process, and the demand for its termination is completely baseless,” the spokesperson said in an emailed statement. “We are confident that Qualcomm's rights under the agreement with Arm will be upheld.”
The two are headed to a trial to resolve Arm's breach of contract claims and Qualcomm's countersuit. The disagreement centers on Qualcomm's acquisition of another Arm licensee in 2021 and the failure — according to Arm — to renegotiate the terms of the deal. Qualcomm argues that its existing agreement covers the operations of the company it purchased, chip-design startup Nuvia.
Nuvia's work in microprocessor design has become central to new personal computer chips that Qualcomm and HP Inc. and sells to companies like Microsoft Corp The processors are key components of a new line of artificial intelligence-focused laptops known as AI PCs Earlier this week, Qualcomm announced plans to bring Nuvia's design — called Orion — to more widely used Snapdragon chips for smartphones.
Arm says the move is a violation of Qualcomm's license and the company is demanding the destruction of Nuvia designs created before the Nuvia acquisition. They cannot be transferred to Qualcomm without permission, according to the original lawsuit filed by Arm in the US District Court of Delaware. Nuvia's license was revoked in February 2023 after negotiations failed to reach a resolution.
“Arm's move to revoke Qualcomm's architectural license appears to be an attempt by the parties to gain leverage ahead of the Dec. 16 trial,” Bloomberg Intelligence analysts Tamlin Basan and Kunjan Sobhani wrote in a research note. “Our thesis: Arm's suit against Qualcomm would likely end in a negotiated license, giving the chipmaker the right to customize the Arm architecture, but at a higher royalty rate than Nuvia was paying.”
Like many others in the chip industry, Qualcomm relies on an instruction set from Cambridge, England-based Arm, a company that developed much of the underlying technology for mobile electronics. An instruction set is the basic computer code that chips use to run software such as operating systems.
If Arm follows license termination, Qualcomm will be prevented from making its own designs using Arm's instruction set. It would still be able to license Arm's blueprints under separate product agreements, but that path would cause significant delays and force the company to undo work already done.
Before the dispute, the two companies were close partners that helped propel the smartphone industry forward. Now, under new leadership, they are both pursuing strategies that make them competitive.
Under Chief Executive Officer Rene Haas, Arm has moved toward offering more complete designs—ones that companies can take directly to contract manufacturers. Haas believes his company, still mostly owned by Japan's SoftBank Group Corp., should be rewarded more for the engineering work it does. The shift limits business to Arm's traditional customers, such as Qualcomm, who use Arm's technology in their own final chip designs.
Meanwhile, under CEO Cristiano Amon, Qualcomm is moving away from using Arm designs and prioritizing its own work, something that potentially makes it a less profitable customer for Arm. He's also expanding into new areas, particularly computing, where Arm is making its own push. But the two companies' technologies are intertwined, and Qualcomm is not yet in a position to make a clean break from the arm.
Arm was acquired by SoftBank in 2016, and part of it was sold to the public in an offering in September last year. The Japanese company still owns more than 80% of Arm.
Arm has two types of customers: companies that use its designs as the basis for their chips, and those that manufacture their own semiconductors and license only the Arm instruction set.
Qualcomm is no stranger to licensing disputes. The company gets a large portion of its profits by selling the rights to its own technology – a key part of mobile wireless communications. Its customers include Samsung Electronics Co. and Apple Inc., the two largest smartphone makers
Qualcomm emerged victorious in 2019 from an extensive legal battle with Apple. It also won a court decision on appeal against the US Federal Trade Commission, which alleged that the company was using predatory licensing practices.
