IP Law Daily, PATENT—Fed. Cir.: Patent suit against Microsoft revived, exclusion of damages expert reversed, (Mar 9, 2026)

By Saurabh Kashyap, B.A., M.A., LL.B., LL.M.

The district court misapplied precedent in excluding the patent owner’s damages expert for using virtual machine usage as the royalty base.

The U.S. Court of Appeals for the Federal Circuit reversed a district court order that excluded the plaintiff patent owner’s damages expert testimony and vacated the court’s denial of a motion to reopen discovery as well as its grant of summary judgment in favor of the defendant, Microsoft Corporation. The appellate court held that the district court misapplied precedent when it excluded the expert’s reasonable royalty analysis for relying on virtual machine usage as the royalty base. The Federal Circuit determined that the methodology was sufficiently tied to the accused technology and that the district court abused its discretion under Federal Rule of Evidence 702. It therefore remanded the case for further proceedings and awarded costs to the plaintiff patent owner (Exafer Ltd v. Microsoft Corp., No. 24-2296 (Fed. Cir. Mar. 6, 2026)).

Background. The plaintiff/appellant, Exafer Ltd., is a technology company that owns patents related to network data-flow optimization in virtual computing environments. The defendant-appellee, Microsoft Corporation, is a global software and cloud-services provider that operates the Azure cloud computing platform.

The litigation concerned U.S. Patent Nos. 8,325,733 (the ’733 patent) and 8,971,335 (the ’335 patent). Both patents relate to systems and methods for improving the efficiency of data transmission in virtualized computer networks. The inventions describe mechanisms for optimizing communication paths between virtual network devices by dynamically controlling how data frames are forwarded through network switches and by identifying optimal routing paths across different layers of a network architecture.

Exafer sued Microsoft in the Western District of Texas, alleging that Microsoft’s Azure cloud platform, specifically its Smart Network Interface Cards (SmartNICs) and Virtual Filtering Platform (VFP) Fastpath technology, infringed the asserted patents. During discovery, Exafer submitted expert reports from technical expert Dr. Paul Congdon and damages expert Justin Blok. Blok’s report calculated a reasonable royalty based on the number of virtual machines hosted on Microsoft’s servers, arguing that the accused technologies increased server efficiency and allowed Microsoft to operate more virtual machines. Microsoft moved to exclude Blok’s testimony under Federal Rule of Evidence 702 and Daubert, contending that the damages analysis improperly relied on unaccused virtual machines as the royalty base. The district court granted Microsoft’s motion, denied Exafer’s request to reopen discovery to present an alternative damages theory, and then granted Microsoft summary judgment on the ground that Exafer lacked admissible evidence of damages. Exafer appealed.

Expert testimony and royalty analysis. The Federal Circuit first addressed the exclusion of the damages expert’s testimony. Applying Fifth Circuit law governing evidentiary rulings, the appellate court explained that such decisions are reviewed for abuse of discretion. Citing Reitz v. Woods, 85 F.4th 780 (5th Cir. 2023), the court reiterated that a district court abuses its discretion when its decision rests on an erroneous view of the law or a clearly erroneous assessment of the evidence.

The district court had relied heavily on Enplas Display Device Corp. v. Seoul Semiconductor Co., 909 F.3d 398 (Fed. Cir. 2018) to exclude Blok’s damages model. In Enplas, the Federal Circuit vacated a damages award because the royalty base improperly included products that had no causal connection to the alleged infringement. The district court concluded that Exafer’s reliance on virtual machines similarly incorporated non-infringing activities into the royalty base.

The Federal Circuit rejected that interpretation, explaining that Enplas did not establish a categorical prohibition against using unaccused products as part of a royalty base. Instead, the key inquiry is whether the damages theory reflects a causal relationship between the patented technology and the economic value being measured.

The appellate court concluded that Exafer’s damages methodology satisfied this requirement. The record showed that the accused Azure networking technologies improved CPU efficiency on Microsoft’s servers, thereby enabling Microsoft to host additional virtual machines on the same hardware infrastructure. Exafer’s technical expert relied on Microsoft’s internal documents showing substantial CPU performance improvements attributable to SmartNIC and VFP Fastpath technologies. Using those findings, the damages expert calculated the incremental value Microsoft gained from being able to offer more virtual machine capacity.

The Federal Circuit emphasized that a reasonable royalty analysis is inherently fact-specific. Citing Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359 (Fed. Cir. 2008), the court explained that damages calculations must reflect how the parties would have valued the patented technology at the time of a hypothetical negotiation. The court further noted that damages models sometimes rely on sales of unaccused products that embody the benefits of the patented method. Citing Amgen Inc. v. Hospira, Inc., 944 F.3d 1327 (Fed. Cir. 2019), the Federal Circuit observed that courts have permitted royalties based on sales of products manufactured using patented methods.

Applying these principles, the Federal Circuit determined that Blok’s model did not improperly expand Exafer’s patent monopoly to unrelated technology. Instead, it quantified the incremental value Microsoft obtained from increased virtual machine capacity made possible by the accused networking features.

Conclusion. Because the district court wrongly excluded the damages testimony, the Federal Circuit reversed that ruling and vacated the court’s subsequent orders denying Exafer’s motion to reopen discovery and granting Microsoft summary judgment based on the absence of a damages remedy. The appellate court remanded the case for further proceedings consistent with its opinion and awarded costs to Exafer.

The Case is No. 24-2296.

Judge: Moore, K.

Attorneys: Elizabeth Bernard (Daignault Iyer LLP) for Exafer Ltd. Kelly Catherine Hunsaker (Winston & Strawn LLP) for Microsoft Corp.

Companies: Exafer Ltd.; Microsoft Corp.

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