IBM Corp. (NYSE: IBM)'s breach-of-contract lawsuit against top engineer Steve Papermaster reveals that Apple Inc. (Nasdaq: AAPL), which on Tuesday named Papermaster senior VP for devices hardware engineering, is planning to design its own chips for use in its iPhone and iPod portable devices. It also shows that Apple may be intending to beef up its presence in the server market.

Apple lured Papermaster from IBM because the company "intends to design microprocessors for incorporation in a variety of electronic devices, including handheld devices," IBM states in its legal complaint, filed last week in U.S. District Court in Manhattan.

Apple also "intends to expand its presence in the server business through the acquisition of P.A. Semi and the hiring of Mr. Papermaster," IBM claims. Apple purchased chip design firm P.A. Semi earlier this year for an undisclosed amount. To date, Apple has said little about its motivations behind the buyout.

Apple currently relies on Samsung Corp. and other third parties for chip components. Bringing chip design in-house, however, could give the company more control over the process. But it could also expose Apple to product delays if the process does not go smoothly.

Papermaster replaces iPod senior VP Tony Faddell at Apple. Apple said Faddell wants to spend more time with his family and will take a reduced role in the company.

But Papermaster's employment with Apple won't last long if IBM has its way. Papermaster was part of IBM's elite Integration & Values team until last month, and is a top expert in IBM's Power microprocessor architecture. Big Blue claims Papermaster signed a non-compete contract that forbids him from joining a rival tech vendor within a year of ceasing employment at IBM.

The company is asking the court to enjoin Papermaster from working at Apple. Papermaster's position at Apple violates "his contractual obligation to refrain from working for an IBM competitor for one year" after leaving the firm, IBM states in court papers.

— Paul McDougall, InformationWeek