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In Legal Fight With Arm, Qualcomm Just Has A Microchip On Its Shoulder (NASDAQ:QCOM)

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It looks like QUALCOMM Incorporated (NASDAQ: QCOM) is going on another strike because of his competitive behavior. In 2019, US District Judge Lucy Koh wrote that Qualcomm forced unreasonably high royalties to stifle competition, and it appears that very few has since changed given Qualcomm’s irrational refusal to abide by its contracts with its major technology supplier. Let’s take a look at why the world’s inventors and investors are voicing their concerns.

Inflation, out-of-control energy prices, the war in Ukraine and countless other problems have eroded trillions of dollars in wealth so far this year, but no index is hemorrhaging like the NASDAQ. While tech stocks surged during COVID shutdowns — as everyone forced shows, worked from home and ordered food online — 2022 is a different story.

Year to date, Apple Inc. (AAPL) down 25 percent, Alphabet Inc. (GOOG, GOOGL) 40 percent, Amazon.com, Inc. (AMZN) 50 percent, Netflix, Inc. (NFLX) 60 percent, and Meta Platforms, Inc. (META) is past the point of zero return at 80 percent!

With those big boys hurting as much as they are, it’s no surprise that the broader index has lost one-third of its value this year.

NASDAQ Nov 2021 - Nov 2022

NASDAQ Nov 2021 – Nov 2022 (Search Alpha)

US-based technology stocks have driven the incredible growth of the past 20 years, creating more wealth than at any other time in human history. It’s in no one’s interest for the NASDAQ to bleed – er, leak – like this. This is certainly not the time to start screwing up what has led to this growth: America’s intellectual property infrastructure.

America’s robust system of patent protection is what drives inventors to pour their precious time and brainpower into an idea and investors to do the same thing with their precious capital. Both are assured that if they take a risk on the next big thing, they will be rewarded. That reward almost always involves reliance on a specific form of contract—a patent license agreement.

As one genius, billionaire, playboy and philanthropist put it: “This is how dad did it, this is how America does it, and it’s worked out pretty well so far.”

That’s why it’s fair for all inventors and investors to be concerned when tech companies—especially in high-stakes industries like the semiconductor space—threaten to derail the patent system for their own gain.

In the fight against Qualcomm, arm protects its IP

For years, Qualcomm built its products around Arm’s critical intellectual property. Using designs licensed from Arm, the British chip maker owned by SoftBank, it markets various system on a chip (SOC) products. Arm’s foundational technology makes these products faster with less power consumption – a critical advantage in the world of mobile computing. But these multinational semiconductor companies have recently sent their lawyers into battle with each other. This resulted in a lawsuit in which Arm sued Qualcomm for breach of contract and trademark infringement.

The dispute began when Qualcomm acquired Nuvia in 2021, a fellow technology company that had a separate architecture license agreement (ALA) with Arm for designing custom processor cores. (Legal for those who want it here. Find Alpha analysis of the acquisition here.)

Now, ALAs are relatively rare and come with specific legal requirements, which Qualcomm and Nuvia were legally obligated to comply with. Only through strict compliance could Nuvia transfer its rights and designs to Qualcomm. Arm’s legal filings argue that they did not and now both Nuvia and Qualcomm have lost the ability to use Arm’s technology reflected in the Nuvia designs. Here are just a few of what Arm’s complaint outlines:

  • Qualcomm needed Arm’s consent to transfer the licenses and resulting technology from Nuvia to Qualcomm, including any transfer in connection with the acquisition of Nuvia. Everyone agrees that Qualcomm never did. (Page 7, Paragraph 28 of Arms Lawsuit.)
  • Instead, Qualcomm sought permission, which Arm did not grant. (Page 66, paragraphs 204-205 of Qualcomm response.)
  • Despite this, through 2021 and 2022 in repeated public appearances, Qualcomm continued to use the designs and technology that Nuvia built with the Arm license. (Pages 8-10, paragraphs 29-38.) In February, Arm terminated the Nuvia licenses and ordered the companies to stop using and destroy technology developed under them. (Page 12, Paragraph 39.)
  • Qualcomm confirmed in April that licenses had indeed been terminated, agreed to stop using the Arm technology included in the Nuvia designs … but continued to use the technology. (Pages 12-15, paragraphs 42-53.)
  • Qualcomm now appears to suggest that it never needed to obtain Arm’s consent. However, if this was really Qualcomm’s view, why did it ask for Arm’s consent in 2021, continue to negotiate with Arm for months, accept the termination in 2022?

This analyst may not have a patent law degree, but it all looks very bad for Qualcomm – and its investors – if true.

Notably, Qualcomm does not argue that the relevant Arm technology is not valid or that it does not use it. Qualcomm (and the semiconductor ecosystem) has been building its business around it for years. And no one seems to be debating whether Nuvia’s license has disappeared. In the United States and around the world, this means you must stop using the innovator’s IP.

Sticking to the facts, it’s clear: this is first and foremost an IP dispute.

To that end, the smart money is that the court system will find that Arm is only protecting its IP, which any responsible company is bound to do in a position like this, especially when blatant violations damage the company and its stakeholders. And Arm is not looking for money, new fees or new royalties – just the protection of its intellectual property.

Indeed, Arm is not only doing what is right for them, but what is right for the entire ecosystem. No company should be taking another company’s IP without a license, and while any contentious litigation causes short-term pain for those involved, a positive long-term outcome is good for the entire industry. If Arm doesn’t back down, it could set a dangerous precedent for nefarious actors to exploit in future acquisitions, posing a serious threat to the tech industry in the long term.

This dispute is particularly important amid the ongoing economic head-to-head between the United States and China, and the potential for increased competition in the wake of the CHIPS Act in the United States.

The NASDAQ needs tech companies that take advantage of America’s strong patent system, not those that exploit it with a chip on their shoulder, or microchip as it were.

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