The Federal Circuit has reversed a district court’s exclusion of a report from a damages expert that had been excluded because the damages estimate used a royalty base to calculate damages that had included virtual machines (VMs) that were not part of the hardware product accused of infringing the patents at issue.
The case is Exafer Ltd. v. Microsoft Corp.
Exafer owns U.S. Patent Nos. 8,325,733 and 8,971,335, which relate to systems and methods for optimizing communication paths between virtual network devices by controlling data forwarding rules at intelligent switches.
Exafer sued Microsoft, accusing Microsoft’s Azure Platform, and specifically the Azure Smart Network Interface Cards (SmartNICs) and Virtual Filtering Platform (VFP) Fastpath technology (Accused Features), of infringing the asserted patents.
Exafer presented expert reports from its technical expert, Dr. Congdon, and damages expert, Mr. Blok, quantifying the alleged technical and financial benefits of Microsoft’s alleged infringement.
A virtual machine is a computer system created using software on one physical computer in order to emulate the functionality of another separate physical computer.
As Microsoft explains,
An example of a VM is VMware Workstation, which allows users to run multiple operating systems like Windows, Linux, and macOS on a single physical computer. This lets developers test software in different environments without needing separate hardware.
As the Federal Circuit related,
Dr. Congdon opined that the network optimization and efficiency improvements achieved by the claimed inventions “would translate to, among other benefits, the ability to operate more virtual machines on a single CPU or host (i.e., increasing virtual machine density). Accordingly, by increasing virtual machine density, Microsoft would be able to sell more virtual machines without the need for additional network infrastructure.”
Also, said the court,
Mr. Blok’s 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.
Microsoft filed a Daubert motion to exclude all of Mr. Blok’s opinions and Dr. Congdon’s opinions related to damages under Federal Rule of Evidence 702.
(A Daubert motion is a pre-trial request to exclude or limit allegedly unreliable or irrelevant expert witness testimony.)
The district court granted Microsoft’s motion as to Mr. Blok’s opinions because he used unaccused virtual machines as the royalty base for his damages estimate, but the district court denied the motion as to Dr. Congdon’s opinions.
35 U.S.C. § 284 requires compensation for patent infringement to be no less than a reasonable royalty
A “hypothetical negotiation” in patent law is a framework for calculating a reasonable royalty and simulates a negotiation between the patent owner and infringer at the time infringement began. It assumes both parties are willing to enter a license, and treats the patent as valid and infringed, to determine what price the parties would have agreed upon to avoid litigation.
Exafer argued the district court erred in excluding Mr. Blok’s damages opinions because Exafer’s damages theory based on VMs per hour (VM-hours) (i.e., Microsoft’s VM pricing rate) reliably reflected how Microsoft valued the Accused Features at the time of hypothetical negotiation between the parties.
The Federal Circuit found that the district court abused its discretion in excluding Mr. Blok’s damages opinions as unreliable under Rule 702 for using VMs as its royalty base.
Here, said the court,
Microsoft’s own documents demonstrate that Mr. Blok’s VM-hour royalty base was based on a causal connection between the Accused Features of the Azure Platform and VMs.
According to the court, Blok’s “methodology is tethered to the patented invention and does not expand Exafer’s patent monopoly to unpatented technology.”
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