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On 6 March 2026, the Federal Circuit concluded that an expert damages opinion provided in the patent infringement matter Exafer Ltd. v. Microsoft Corporation was excluded in error.1 The exclusion at issue related to a 7 March 2024 order issued by United States Magistrate Judge Mark Lane in the United States District Court for the Western District of Texas (Austin Division).2 In particular, Judge Lane had excluded the opinions of plaintiff’s damages expert, who used sales of products “not accused of infringement” as his “royalty base to determine damages.”3 However, the Federal Circuit “reverse[d] the district court’s exclusion” of plaintiff’s damages expert report and vacated the district court’s “granting [of] summary judgement based on absence of a remedy.”4 In its opinion, the Federal Circuit focused on the demonstration of a causal connection between the royalty base selected and the alleged infringement of the patents-in-suit. The Federal Circuit noted the causal connection was shown in Microsoft’s own documents and a technical expert opinion relied upon by the damages expert.5
By way of background, Exafer accuses Microsoft of infringing two patents that “describe ways to optimize data transmission efficiency within a network.”6 Of relevance, Microsoft’s Azure is a “cloud computing platform that offers products and services to build, deploy, and manage applications
on any device,” where “[o]ne service Azure offers is ‘virtual machines’ (VM), which are software representations of physical computers that run on Azure servers hosted in the Azure cloud.”7 The plaintiff does not accuse Microsoft’s VMs of infringing the patents-in-suit.
However, the plaintiff’s technical expert “contends that the Accused Features,” namely Microsoft’s Azure network’s “VFP Fastpath” and “SmartNIC Accelerated Networking,” create “efficiencies that enable Microsoft’s services to host more VMs.”8 Relying on this technical opinion, the plaintiff’s damages expert “value[d] the Accused Features based on the amount of VMs on the network.”9 As is customary from an economic perspective, the plaintiff’s damages expert multiplied his royalty rate by his royalty base for an estimate of reasonable royalties. In this case, the expert used the “total number of virtual machine hours [i.e., VM-hours] Microsoft sold” during the relevant period as his royalty base.10
Based on our reading of the order, this appears to be an example of an economic expert relying on the income approach to valuation. The income approach involves determining the incremental benefits from the patented feature(s) that would be expected to accrue to the licensee in the hypothetical negotiation.11 The Georgia-Pacific factors (a set of 15 factors that are to be considered in determining the reasonable royalty that would emerge from a hypothetical negotiation between a “willing” patent owner and a “willing” licensor of the patent) are instructive for experts when estimating incremental benefits to be considered.12
For example, the 10th Georgia-Pacific factor speaks to the relevance of incremental benefits accruing from the patent-in-suit, in which the “nature of the patented invention” and the “benefits to those who have used the invention” are to be considered.13 The 13th Georgia-Pacific factor relates to the “portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.”14 While this 13th Georgia-Pacific factor is understood to relate to what is commonly referred to as “apportionment,” it also implies that economic experts should consider the causal connection between the patented feature and the profits being identified.
Given the plaintiff’s damages expert’s royalty base selection in the Exafer Ltd. matter, the defendant argued “that it is impermissible to base damages on VMs, which are unaccused technology.”15 For this argument, defendant relied, in part, upon the Federal Circuit’s opinion in Enplas Display Device Corp. v. Seoul Semiconductor Co., which quoted the Federal Circuit’s finding in AstraZeneca AB v. Apotex Corp. that a reasonable royalty “cannot include activities that do not constitute patent infringement, as patent damages are limited to those ‘adequate to compensate for the infringement.’”16
While plaintiff argued that “at the time infringement began Microsoft valued the Accused Features by the extent to which they could increase the amount of VMs offered on a server,” Judge Lane noted that plaintiff “cited no case holding that the royalty base could entirely consistent of unaccused technology.”17 In his discussion of Enplas Display Device Corp. v. Seoul Semiconductor Co., as relied upon by defendants, Judge Lane stated that the “damages award included payment for infringing products and potentially infringing products.”18 Judge Lane found that “[s]imilarly,” the plaintiff’s damages expert’s here “uses sales of VMs—which are not accused of infringement—as the royalty base to determine damages.”19
Judge Lane concluded that plaintiff “failed to meet its burden to show that [the plaintiff’s damages expert’s] damages theory is based on a sufficiently reliable methodology such that it should go before a jury.”20 While plaintiff “moved to reopen fact and expert discovery to present an alternative damages theory,” the district court denied the motion.21 The district court then granted defendant’s motion for “summary judgement based on absence of a remedy.”22
Upon appeal, the Federal Circuit stated that a “reasonable royalty is not necessarily unreliable under Rule 702 because it uses a royalty base associated with an unaccused product.”23 Instead, the “facts associated with the alleged infringing activity must be assessed on a case-by-case basis to determine how the parties would value the accused technology during the hypothetical negotiation.”24
In this case, the Federal Circuit agreed with plaintiff that “the district court misapplied Enplas Display Device Corp. v. Seoul Semiconductor Co.” such that it would “improperly create a ‘categorical bar to considering non-infringing activities in a reasonable royalty analysis.’”25 Moreover, plaintiffs argued that “the district court erred in excluding [the plaintiff’s damages expert’s] damages opinions because [his] damages theory based on VMs per hour” had “reliably reflected how Microsoft valued the Accused Features at the time of the hypothetical negotiation.”26 The Federal Circuit agreed.
The Federal Circuit distinguished its findings in Enplas Display Device Corp. v. Seoul Semiconductor Co. from the current matter; in the former case “the unaccused, potentially infringing products the
plaintiff included in its royalty base had no causal connection to the accused infringing products such that the royalty base” was improper.27
As discussed previously, the Georgia-Pacific factors speak to consideration of the causal connection between the patented feature(s) and the reasonable royalties provided via the hypothetical negotiation.28 Causation is often a consideration for economists in intellectual property valuation.
The Federal Circuit found that “Microsoft’s own documents demonstrate” a “causal connection” between the accused features and the VMs that comprise the royalty base.29 The Federal Circuit also pointed to the plaintiff’s technical expert opinion, which was based in part on “an internal Microsoft presentation” and an “internal estimate” showing benefits afforded by the accused features.30
The plaintiff’s damages expert relied upon the technical expert’s opinion, including that the “network optimization and efficiency improvements achieved by the claimed inventions ‘would translate
to, among other benefits, the ability to operate more [VMs] on a single CPU or host,’” where “‘by increasing [VM] density, Microsoft would be able to sell more [VMs] without the need for additional network infrastructure.’”31
The Federal Circuit concluded that the plaintiff’s damages expert “accounted for the causal connection between the Accused Features and VMs in his valuation of the Accused Features,” where his “VM-hour royalty base captured this incremental benefit of being able to offer additional VMs due to operation of the Accused Features within the Azure Platform.”32 The Federal Circuit found that the methodology of the plaintiff’s damages expert “is tethered to the patented invention” and concluded that such testimony “satisfies the admissibility standards of Rule 702.”33
Footnotes
1. Exafer Ltd. v. Microsoft Corporation, No. 24-2296, US Court of Appeals for the Federal Circuit (Order March 6, 2026).
2. Exafer Ltd. v. Microsoft Corporation, No. 1:20-cv-00131-RP (W.D. TX), (Exclusion Order March 7, 2024).
3. Id., p. 6. 4
4. Exafer Ltd. v. Microsoft Corporation, No. 24-2296, US Court of Appeals for the Federal Circuit (Order March 6, 2026), p. 2.
5. Id., p. 6–7.
6. Exafer Ltd. v. Microsoft Corporation, No. 1:20-cv-00131-RP (W.D. TX), (Exclusion Order March 7, 2024), p. 1.
7. Id., p. 7.
8. Ibid.
9. Ibid.
10. Ibid.
11. Other approaches to valuation include the market approach, which generally involves licensing evidence relevant to the asserted patents, and the cost approach, which generally involves estimating the cost to develop (from the patent holder’s perspective) or cost to design-around or design-out the patented feature.
12. Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).
13. Id., p. 1120.
14. Ibid.
15. Exafer Ltd. v. Microsoft Corporation, No. 1:20-cv-00131-RP (W.D. TX), (Exclusion Order March 7, 2024), p. 4. 4
16. Id., p. 5, citing Enplas Display Device Corp. v. Seoul Semiconductor Co., 909 F.3d 398, 411 (Fed. Cir. 2018), which quoted AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1343 (Fed. Cir. 2015).
17. Ibid.
18. Ibid.
19. Id., p. 6.
20. Ibid.
21. Exafer Ltd. v. Microsoft Corporation, No. 24-2296, US Court of Appeals for the Federal Circuit (Order March 6, 2026), p. 4.
22. Ibid.
23. Id., p. 7.
24. Ibid.
25. Id., p. 5.
26. Ibid.
27. Id., p. 6.
28. Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970).
29. Exafer Ltd. v. Microsoft Corporation, No. 24-2296, US Court of Appeals for the Federal Circuit (Order March 6, 2026), p. 6.
30. Ibid.
31. Id., p. 8.
32. Id., p. 6–7, 8.
33. Id., p. 8.
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