Exafer Ltd. sued Microsoft Corporation for patent infringement, alleging that Microsoft's Azure Smart Network Interface Cards and Virtual Filtering Platform technology infringed two of Exafer's patents related to optimizing data flow in virtual networks. Exafer retained a damages expert, Mr. Justin Blok, who calculated a reasonable royalty based on the number of virtual machine hours Microsoft could host due to the efficiency gains provided by the accused features. Microsoft moved to exclude this testimony under Federal Rule of Evidence 702, arguing that using unaccused virtual machines as the royalty base improperly expanded Exafer's patent monopoly. The district court granted Microsoft's motion to exclude the testimony and subsequently granted summary judgment against Exafer, ruling that there was no available remedy. Exafer appealed, arguing that the damages theory was sound and that the court should have allowed them to reopen discovery to present alternative theories.
Chief Judge Moore, writing for the panel, analyzed whether the district court abused its discretion in excluding Mr. Blok's damages opinions. The district court had relied on Enplas Display Device Corp. v. Seoul Semiconductor Co., which vacated a damages award where the royalty base included potentially infringing products with no causal connection to the accused infringement. The Federal Circuit distinguished Enplas, noting that in this case, Microsoft's own internal documents demonstrated a causal link between the accused features and the ability to host additional virtual machines. Dr. Congdon, Exafer's technical expert, opined that the patented technology reduced CPU usage, thereby freeing up cores to host more virtual machines. Mr. Blok's methodology used this causal connection to value the technology in terms of the incremental virtual machine hours Microsoft could sell. The court reasoned that a reasonable royalty is not necessarily unreliable simply because it uses a royalty base associated with an unaccused product. Instead, the facts must be assessed on a case-by-case basis to determine how the parties would value the accused technology during a hypothetical negotiation. Since the damages theory was tethered to the patented invention and did not expand the patent monopoly to unpatented technology, the testimony satisfied the admissibility standards of Rule 702. Consequently, the district court's exclusion of the evidence was an abuse of discretion.
The decision remands the case to the district court for further proceedings consistent with the Federal Circuit's opinion. This means the summary judgment in favor of Microsoft is vacated, and Exafer will be allowed to present its damages evidence to a jury or for further judicial consideration. The ruling clarifies that patent holders can use unaccused products as a royalty base if they can demonstrate a causal connection between the patented technology and the value of those unaccused products, preventing a per se exclusion of such damages theories.
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