As featured in Bloomberg Law on June 13, 2023

The US chip design sector needs a differentiator to stay ahead of growing competition from Asia for the strategically important smartphone market. The premium smartphone segment has historically driven demand for leading-edge semiconductor manufacturing—largely based in Taiwan and South Korea by TSMC and Samsung respectively.

Advanced chip architecture and design for mobile computing underpin the next generation of PCs for the AI era. Coincidently, Qualcomm—with its legacy of leadership in mobile computing and acquired Nuvia technology—is uniquely positioned as a pioneer. It has potential to help sustain overall US chip technology and market leadership in the new AI-infused era of PC computing.

But a licensing dispute between Arm, the leading chip architecture designer, and Qualcomm and Nuvia could imperil the US’s competitiveness in the semiconductor industry.

Market Leaders

In 2021, US-based Qualcomm acquired US-based Nuvia for a lofty $1.4 billion. It was a welcome surprise, as Nuvia’s revolutionary CPU technology promised to outdo what Apple’s M Series processors had disruptively done in the PC market. Qualcomm is also widely regarded as the ideal fabless chipmaker to take Nuvia’s technologies to market, with its leadership in the important smartphone market and emerging Windows on Arm PC market.

Amid a pandemic chip shortage and growing national security concerns with a burgeoning Chinese semiconductor industry, the prospects of a Qualcomm armed with Nuvia technology were timely. In recent years, Chinese chip designers—including Huawei’s HiSilicon—have made notable and sometimes surprising strides with chips based on UK-based and Softbank Group-owned Arm’s architecture and designs.

For these reasons, Qualcomm’s leadership in premium smartphone and emerging Arm-based PC markets is an important driver of demand for leading US-based semiconductor manufacturing, which the US government hopes to realize with the CHIPS Act of 2022. But unfortunately for US chip designers such as Qualcomm, AMD, and Marvell, none of the $52.7 billion in federal appropriations is directly earmarked toward supporting the advancement of chip design.

Bumpy Legal Path

Despite a 20-year symbiotic relationship, in August 2022, Arm filed a lawsuit against Qualcomm and Nuvia for what it claimed was a breach of Nuvia’s license agreement and trademark infringement. The lawsuit has undermined prospects of Qualcomm boosting US chip design leadership and advancing Arm into the Windows PC market that has long eluded the Arm ecosystem.

According to court filings, the Qualcomm and Arm dispute appears related to Nuvia’s license agreement with Arm—primarily with the transfer of license, “confidential information,” and Arm intellectual property to Qualcomm without consent.

Practically speaking, a breakdown in pre- and post-acquisition royalty negotiations appears to be the key source of impasse and contention that brought Arm to seek remedy in court. Early on, Arm appears to have proposed a transfer royalty rate that was much higher than the rate under Qualcomm’s own existing licenses with Arm.

Much like licensing in the world of standard essential patents, IP licensing in the semiconductor industry is complex, nuanced, and commonly misunderstood. For this reason, it’s important to note that Nuvia and Qualcomm are holders of architecture license agreements.

Unlike the majority of Arm licensees that are licensed solely under terms of a technology license agreement, Nuvia and Qualcomm license Arm’s architecture and technologies, and the right to develop custom core designs on top of them, for specific applications and markets through their respective ALAs.

In the case of pre-acquisition Nuvia, we can surmise from court filings and company disclosures that Nuvia’s ALA license was for server chips for the server market. According to a countersuit filed by Qualcomm, Arm’s royalty rate with Nuvia was negotiated for the low-volume, high-margin server market. This was apparently an unworkable rate for the high-volume, lower-margin smartphone and PC markets that Qualcomm intended for their newly acquired Nuvia technology.

Besides, Nuvia hadn’t shipped a single processor prior to being acquired.

Arm has complained publicly and in court that Qualcomm is developing and applying Nuvia technologies in breach of a now-defunct Nuvia agreement, which Arm terminated with Qualcomm’s consent. In Qualcomm’s view, they have their own ALA that is broader, giving them the right to incorporate Nuvia technology in their products.

Despite their grievance, Arm hasn’t yet moved to curtail what it claims is unlicensed use of their IP and confidential information on Qualcomm’s part.

Qualcomm seems confident it has the contractual right to use acquired Nuvia technology and knowhow under its existing ALA with Arm. The company publicly announced its plans and progress in bringing its new Oryon CPU cores—to market for the Windows PC and smartphone market, and beyond as scheduled and undeterred.

The lawsuit is unfortunate, but will be resolved one way or the other without degrading the global IPR regime that has fostered incredible advancement and innovation in the semiconductor industry globally.

But if Nuvia’s technology and IP were to be destroyed—as Arm has demanded in its court filings—this would eliminate an essential domestic demand driver for the advanced semiconductor manufacturing base that the CHIPS Act urgently seeks to reconstitute in the US.

Moreover, it would weaken the overall US semiconductor industry’s ability to maintain its global leadership in increasingly competitive chip design. That would certainly be a risk to domestic semiconductor industry competitiveness and, arguably, national security.