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In Exafer Ltd. v. Microsoft Corp., the Federal Circuit vacated a district court's exclusion of expert damages testimony and clarified the proper reach of its 2018 decision in Enplas Display Device Corp. v. Seoul Semiconductor Co. which was understood to stand for the proposition that unaccused or non-infringing activity cannot serve as the basis for reasonable royalty damages.
Exafer's damages theory focused on the economic benefits flowing from efficiency gains that allegedly resulted from infringement of the patents at issue, which generally related to optimizing certain aspects of virtual network devices. Its expert opined that the accused features in Microsoft's Azure platform reduced central processing unit ("CPU") usage in Azure servers. By reducing CPU consumption, Microsoft freed CPU cores that could be used to host additional virtual machines ("VMs"). Those additional VMs—while not themselves accused of infringement—generated revenue for Microsoft. Exafer's damages expert used that VM-related revenue as the royalty base, reasoning that Microsoft's infringement enabled increased VM capacity and thus facilitated additional revenue.
Relying on Enplas, the district court concluded that a royalty base cannot include revenue from unaccused products or non-infringing activity and because Exafer's expert "improperly incorporated 'activities that do not constitute patent infringement' in the royalty base by including 'potentially infringing products,'" the expert's testimony should be excluded under Rule 702.
The Federal Circuit disagreed, however, holding that the district court abused its discretion by reading Enplas too broadly. The panel explained that Enplas did not establish a categorical prohibition on considering non-infringing activity. Rather, the issue in Enplas was the absence of a demonstrated causal connection between the unaccused products included in the royalty base and the accused infringing conduct.
By contrast, in Exafer, the record contained evidence of a direct economic nexus. The expert did not simply rely on VM sales as a convenient proxy, but instead pointed to the relationship between the infringing activity's increasing server capacity and the resulting additional revenue for Microsoft. Because the expert's "methodology is tethered to the patented invention," the Court found it proper.
In rejecting the district court's categorical approach, the Federal Circuit reaffirmed a more flexible, fact-specific framework. Revenue from non-infringing activity may be considered in a reasonable royalty analysis where the patentee demonstrates that infringement drove or facilitated that revenue.
Exafer provides meaningful guidance on when non-infringing products or activities may inform a reasonable royalty analysis, confirming that no categorical bar exists where a causal link tethers revenue to the alleged infringement. The decision is especially significant in cloud computing and software contexts, where infringement often appears as efficiency gains or backend optimizations that drive downstream revenue rather than discrete product sales. By qualifying Enplas, the Court leaves room for more creative damages theories, emphasizing that admissibility turns not on formal product boundaries, but on demonstrated economic causation connecting the patented technology to revenue in other areas of business.
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