IBM Sues GlobalFoundries Over Breach of Contract

Article By : Brian Santo

IBM is suing GlobalFoundries for breach of contract, harking back to GF ceasing development of a 7nm process in 2018.

IBM is suing GlobalFoundries for breach of contract and is asking for $2.5 billion in damages. IBM made GlobalFoundries aware of the suit, but informed EE Times it hasn’t filed it in court yet, and so is not yet prepared to share it publicly. GlobalFoundries has already filed a petition with the New York State Supreme Court to dismiss the pending suit as meritless.

GlobalFoundries’ installation in Malta, N.Y.

Back in 2014, IBM was trying to get out of the commercial semiconductor production business. It was shopping some of its aging fabs, but failed to find any buyers, and ended up paying GlobalFoundries $1.5 billion essentially to take them. The two agreed GF would complete the 14 nm IC production process IBM had been working on (which GF did). GlobalFoundries would then supply IBM with 14-nm chips (and so it did), and GF would simultaneously work on the next node. The next node was supposed to be 10nm, but given the competitive situation in the IC manufacturing business, GF decided to skip 10nm and go directly to 7nm. GF says IBM agreed with this decision.

GlobalFoundries was already badly lagging TSMC and Samsung on 7nm development, and in 2018 it announced it would not complete work on the process. GF argues it would have been financially ruinous to complete development on 7nm.

The crux of IBM’s breach-of-contract accusation is GF’s failure to successfully develop a 7nm IC production process.

Again, IBM has yet to file its documents in court, but it provided EE Times with the following statement regarding GlobalFoundries’ countersuit:

“This lawsuit is yet another attempt by GlobalFoundries to cover up its fraud and deliberate breaches of contract in failing to fulfill its legal obligations to IBM, including the development and supply of high-performance semiconductor chips. IBM contributed $1.5 billion to GlobalFoundries to supply the next generation of chips, and GlobalFoundries utterly abandoned IBM as soon as the final payment was received and sold off assets from the deal for its own enrichment. IBM welcomes the opportunity to seek the recovery of the substantial damages it is due.”

GlobalFoundries countered that it invested the $1.5 billion — and billions of dollars more — on modernizing some of the former IBM fabs (it did, in fact, subsequently sell off some of the fabs it received from IBM, to ON Semiconductor and to Marvell), on developing the 14 nm process, on producing 14nm products (to IBM’s satisfaction, according to GF), and on beginning development of the 7nm process.

But while GlobalFoundries was investing billions of dollars, TSMC and Samsung were investing tens of billions of dollars. GF argues that it lacked the capital to remain competitive, and further, even if it had succeeded in developing a 7nm process, it would have been too late from a marketing perspective.

So GF pulled the plug on 7m. That was in 2018. It explained at the time, and it insists to this day, that it was the only fiscally responsible thing it could do. The company “pivoted,” deciding to concentrate on producing products that do not need to be implemented at single-digit production nodes. Last year the company actually turned a profit, and recently there have been rumors of an impending IPO.

IBM ended up going to Samsung for 7nm production.

GF is currently arguing that turning to Samsung was actually to IBM’s benefit, because IBM was able to buy 7nm wafers from Samsung at a time when 7nm product would be fully competitive. Furthermore, IBM was able to buy those wafers from Samsung at “a fraction” of the price that GF would have had to charge them (assuming GF got to 7nm, which it didn’t). The implication is that IBM knew all that too when it went to Samsung.

Saam Azar, GlobalFoundries’ senior vice president of Legal, told EE Times, “We fulfilled our obligations, and they’re doing better than they would have with us.”

Again, that was in 2018. GF’s document said that the two companies have not communicated since that time — certainly IBM had not complained of any breach of contract since then.

“Two years later,” Azar said, “they come out of the woodwork, and we get this complaint coming from this law firm in New York.”

GlobalFoundries not only publicly shared its petition to dismiss the pending IBM suit, it is also appealing to the court of opinion. With the U.S. Government looking to actively support the domestic semiconductor industry, this is a bad time for two U.S. companies to be squabbling, the company explained in its petition to dismiss.

Azar told EE Times that the timing is also suspicious because if GlobalFoundries was preparing an IPO — which it can’t comment on because the chip maker hasn’t officially announced an IPO, though there have been stories printed by various media outlets saying that the company’s IPO could bring in as much as $30 billion — then a $2.5 billion dollar lawsuit would be material and would likely have adverse effects on the offering, and IBM would know that, GlobalFoundries asserts.

Industry analysts also weighed in late Monday on the chip spat. We corresponded with Tirias Research analysts Jim McGregor and Kevin Krewell.

Asked about the timing of the IBM action — with more than two years elapsed since the alleged breach, Jim McGregor of Tirias Research noted in an email that “the timing really isn’t that suspicious. [GlobalFoundries] now has a profitable year under its belt. However, you could argue that if GF had maintained its bleeding-edge strategy that the company would still be losing money and may not have been competitive with the other foundries, which would have been just as bad for IBM.”

Added Kevin Krewell of Tirias Research, “If GlobalFoundreis had continued to pursue 7nm, it would likely be in a tough financial situation. Even Intel and Samsung have faltered in moving to EUV”— extreme ultraviolet lithography being the technological predicate for IC production at 7nm and below.

While noting he hasn’t seen IBM’s claim or GlobalFoundries’ counterclaim, McGregor did say, theoretically, “if the deal included support from GF on advanced process nodes, then IBM has a legitimate claim. It provided GF with semiconductor assets, IP, and $1.5 billion.”

Krewell added, “The court should follow contract law, not motivations of the parties.”

This article was originally published on EE Times.

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