(Oct 23): Arm Holdings plc is cancelling a licence that allowed longtime partner Qualcomm Inc to use Arm intellectual property to design chips, escalating a legal dispute over vital smartphone technology.

Arm, based in the UK, has given Qualcomm a mandated 60-day notice of the cancellation of their so-called architectural licence agreement, according to a document seen by Bloomberg. The contract allows Qualcomm to create its own chips based on standards owned by Arm.

The showdown threatens to roil the smartphone and personal computer markets, as well as disrupting the finances and operations of two of the most influential companies in the semiconductor industry.

Qualcomm shares fell as much as 3% after trading opened in New York on Wednesday. Arm’s American depositary receipts dropped as much as 6.4%.

Qualcomm sells hundreds of millions of processors annually — technology used in the majority of Android smartphones. If the cancellation takes effect, the company might have to stop selling products that account for much of its roughly US$39 billion (RM169.34 billion) in revenue, or face claims for massive damages.

The move ratchets up a legal fight that began when Arm sued San Diego-based Qualcomm — one of its biggest customers — for breach of contract and trademark infringement in 2022. With the cancellation notice, Arm is giving the US company an eight-week period to remedy the dispute.

Representatives for Arm and Qualcomm declined to comment.

The two are headed to a trial to resolve the breach-of-contract claim by Arm and a countersuit by Qualcomm. The disagreement centres on Qualcomm’s 2021 acquisition of another Arm licensee and a failure — according to Arm — to renegotiate contract terms. Qualcomm argues that its existing agreement covers the activities of the company that it purchased, the chip-design startup Nuvia.

Nuvia’s work on microprocessor design has become central to new personal computer chips that Qualcomm sells to companies such as HP Inc and Microsoft Corp. The processors are the key component to a new line of artificial intelligence-focused laptops dubbed AI PCs. Earlier this week, Qualcomm announced plans to bring Nuvia’s design — called Oryon — to its more widely used Snapdragon chips for smartphones.

Arm says that move is a breach of Qualcomm’s licence and is demanding that the company destroy Nuvia designs that were created before the Nuvia acquisition. They can’t be transferred to Qualcomm without permission, according to the original suit filed by Arm in the US District Court in Delaware. Nuvia’s licences were terminated in February 2023 after negotiations failed to reach a resolution.

Like many others in the chip industry, Qualcomm relies on an instruction set from Cambridge, England-based Arm, a company that has created 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 through with the licence termination, Qualcomm would be prevented from doing its own designs using Arm’s instruction set. It would still be able to licence Arm’s blueprints under separate product agreements, but that path would cause significant delays and force the company to waste work that’s already been done.

Prior to the dispute, the two companies were close partners that helped advance the smartphone industry. Now, under newer leadership, both of them are pursuing strategies that increasingly make them competitors.

Under chief executive officer Rene Haas, Arm has shifted to offering more complete designs — ones that companies can take directly to contract manufacturers. Haas believes that his company, still majority owned by Japan’s SoftBank Group Corp, should be rewarded more for the engineering work it does. That shift encroaches on the business of Arm’s traditional customers, like 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 is prioritising its own work, something that potentially makes it a less lucrative customer for Arm. He’s also expanding into new areas, most notably computing, where Arm is making its own push. But the two companies’ technologies remain intertwined, and Qualcomm isn’t yet in a position to make a clean break from Arm.

Arm was acquired in 2016 by SoftBank, and part of it was sold to the public in an offering in September of last year. The Japanese company still owns more than 80% of the Arm.

Arm has two types of customers: companies that use its designs as the basis for their chips and ones that create their own semiconductors and only licence the Arm instruction set.

Qualcomm is no stranger to licensing disputes. The company gets a large chunk of its profit from 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 biggest smartphone makers.

Qualcomm emerged victorious in 2019 from a wide-ranging legal fight 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 activities.

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