The Arm v. Qualcomm legal fight took a turn for the nasty last week, with Arm reportedly canceling Qualcomm’s license to use Arm IP. This has the makings of some scary headlines, but we think the immediate effects of this news are probably very small. That being said, it opens up some more serious questions as to what Arm is looking to achieve here and how far are they willing to go to do so.
At its most basic level, the lawsuit is basically a contract dispute – Qualcomm pays one rate, Arm thinks Qualcomm should pay a different, higher rate. But this cancelation clearly implies that Arm can cause deeper problems for Qualcomm, should they choose to do so.
Most outside observers view Arm’s cancelation as a fairly common pre-trial maneuver – raise the stakes to give them negotiating leverage for the 11th-hour settlement agreement, we are all expecting. We have seen this tactic deployed by litigants many times in the past in legal disputes, including by and against Qualcomm. However, an outright cancelation seems heavy, at least by the standards of our non-existent legal degree.
All of which begs the question as to why Arm took such a step. If the desire was to apply some pressure to Qualcomm, the move seems to have backfired. Qualcomm’s stock essentially shrugged off the news, closing down 3% for the day, while Arm’s fell almost 7%. And this really gets to the heart of the problem. Qualcomm is one of Arm’s biggest customers. Canceling their license falls very much in the category of cutting off your nose to spite your face. If we all woke up tomorrow and Qualcomm could not ship any chips, customers would not switch overnight to alternatives. Instead, the market would fall apart. Apple would have to stop making iPhones if Qualcomm could not ship them parts. This hurts Arm as much as it hurts Qualcomm. At best, Arm’s threat seems hollow, and Qualcomm (and its lawyers) recognize this.
And this raises a more serious concern than any short-term impact of a license getting canceled. Arm also has plenty of smart lawyers who recognize the flimsy nature of this threat. What if they know this and do not care because they are not trying to settle this lawsuit on the courthouse steps? We worry that this latest move signals that Arm wants to take this to trial. Do they see a victory in this lawsuit as providing them with a strong legal precedent to push through further changes to their business model and their pricing? That would be a great outcome for them, but lawsuits are incredibly risky.
We have studied the industry closely for years. We have worked with both companies. We have negotiated these kinds of contracts many times. We have read both Arm’s complaint and Qualcomm’s response repeatedly. And we are still not clear on who is in the right. But somehow a jury of normal people will be able to decipher this in a predictable fashion? Our concern goes further in that even if Arm wins this lawsuit, what kind of message are they sending to the rest of their customers?
To be clear, we are not taking sides. We do not have all the facts (and we are certainly looking forward to the discovery materials), and as we have said, we have no idea who has the better case. Our concern is simply that this lawsuit risks hurting both companies at a time when both should have higher priorities.
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