Holding: There is no per se rule that a reasonable royalty based on unaccused products is unreliable. Whether such a royalty is permissible depends on the case‑specific facts, including whether a causal connection exists between the proposed royalty base and the accused products.
Exafer owns US Patent Nos. 8,325,733 and 8,971,335, which are related to optimizing communication paths between virtual network devices with intelligent switches. Exafer sued Microsoft, alleging that their Azure Smart Network Interface Cards and Virtual Filtering platform Fastpath product infringe the ‘733 Patent and the ‘335 Patent.
Microsoft filed a Daubert motion to exclude the expert opinion of Exafer’s damages expert, Mr. Blok, and the opinions of Exafer’s technical expert, Dr. Congdon, related to damages. The district court granted Microsoft’s Daubert motion, holding that Mr. Blok used a royalty base for his damages report that was based on Microsoft’s virtual machines, which were not accused of infringement. This decision was based on the Federal Circuit’s decision in Enplas,[1] in which the damages expert improperly included unaccused, potentially infringing products in their royalty base.
At the Federal Circuit, Exafer argued that the district court erred in excluding Mr. Blok’s opinions because although the virtual machines were not accused of infringement, a reasonable royalty based on virtual machines per hour reflected how Microsoft would have valued its accused products at the time of a hypothetical negotiation. The Federal Circuit agreed with Exafer, finding that Enplas did not support the district court’s exclusion of Mr. Blok’s testimony.
In Enplas, the unaccused products had no causal connection to the accused infringing products, so the expert’s damages testimony in that case included activities that did not constitute patent infringement. However, a causal connection between Microsoft’s unaccused virtual machines and Microsoft’s accused products does exist in this case. The implementation of the accused products allowed Microsoft to reduce the CPU usage on its Azure servers so that the CPUs could be used to host additional virtual machines. Exafer’s technical expert detailed the portion of CPU improvement attributable to the asserted patents, and Mr. Blok used the number of additional virtual machines that Microsoft could host due to the CPU improvement to estimate the value of the asserted products. This method does not improperly include activities unrelated to the accused infringement.
A reasonable royalty is not automatically unreliable because it uses a royalty based that is associated with an unaccused product. The basis for a reasonable royalty analysis must be assessed case‑by‑case to determine how the accused technology would have been valued at the time of the hypothetical negotiation. In this case, the ‘733 Patent and the ‘335 Patent are aimed at improving computational efficiency. This optimization would allow Microsoft to host and sell more virtual machines without investing in additional infrastructure. In this instance, a royalty based on virtual machine hours captures the benefit provided by the accused features. Therefore, the Federal Circuit found the damages testimony to be admissible.
[1] Enplas Display Device Corp. v. Seoul Semiconductor, Co., 909 F.3d 398 (Fed. Cir. 2018)
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