EXAFER LTD v. MICROSOFT CORPORATION

Authored by: Jeremy J. Gustrowsky

Exafer Ltd. sued Microsoft Corporation, alleging that Microsoft’s Azure Platform infringed two of Exafer’s patents: U.S. Patent Nos. 8,325,733 and 8,971,335. These patents relate to systems and methods for optimizing data flows within virtual networks, such as by controlling how data is forwarded through intelligent network switches. Exafer specifically accused Microsoft’s Azure Smart Network Interface Cards (SmartNICs) and Virtual Filtering Platform (VFP) Fastpath technology of infringement.

The case centered on a dispute over how to calculate damages. Exafer’s damages expert, Mr. Blok, estimated a reasonable royalty using a “per virtual machine hour” royalty base. His theory was straightforward: Microsoft’s own internal documents showed that the accused technology freed up processing power on Azure servers, allowing Microsoft to host significantly more virtual machines (VMs) and sell that additional capacity to customers. The district court, however, excluded Mr. Blok’s entire damages opinion, reasoning that because the VMs themselves were not accused of infringement, using them as the royalty base improperly swept in non-infringing activity. With no admissible damages theory, the court then granted Microsoft summary judgment on the grounds that Exafer had no viable remedy.

The Federal Circuit reversed, holding that the district court misapplied the earlier Enplas decision. In Enplas, a damages expert had lumped unaccused products into the royalty base with no connection to the infringing activity. Here, by contrast, there was a direct causal link between the accused features and the additional VMs. Microsoft’s own presentations estimated that the accused SmartNIC technology provided a 300% CPU improvement, and VFP Fastpath provided a 50% improvement. Mr. Blok used these figures, along with Microsoft’s VM pricing data, to calculate the incremental benefit the patented technology provided to Microsoft’s Azure business.

The Federal Circuit emphasized that there is no blanket rule against using an unaccused product as a royalty base. Damages analysis is highly fact-specific, and using a royalty base tied to an unaccused product can be perfectly sound when the connection between the patented technology and that product is well-supported. The court pointed out that this kind of approach is common, for example, in cases involving patented methods of manufacture where the royalty base is naturally the product made by the claimed method. What matters is whether the methodology is tethered to the value of the patented invention, not whether the royalty base item is itself accused of infringement.

With the damages expert’s testimony restored, the Federal Circuit reversed the exclusion order, vacated the denial of Exafer’s motion to reopen discovery (as moot), and vacated the summary judgment in Microsoft’s favor. The case was remanded for further proceedings.