EXAFER LTD v. MICROSOFT CORPORATION
Oral Argument — 02/04/2026 · Case 24-2296 · 24:39
0:00
Judge Moore
Our next case for argument is 24-2296, Exifer v. Microsoft.
0:07
Ms. Bernard, please proceed.
0:12
Thank you, Your Honor.
0:18
Appellant Attorney
May it please the Court.
0:20
This appeal turns on two legal errors at the 702 stage in the District Court
0:26
that wiped out Exifer's damages expert opinion in its entirety.
0:31
Judge Moore
If we agree with you that Mr. Block's testimony should have been allowed,
0:35
is that the only issue we have to reach in this case?
0:38
Yes, that's correct, Your Honor.
0:39
Appellant Attorney
If you agree that he—
0:39
I'm going to focus on that.
0:40
Okay.
0:41
So the first legal error that the District Court made in excluding Mr. Block's testimony is—
0:49
excuse me, Your Honor, if I understand.
0:50
Do you want me to focus on the exclusion of Mr. Block slowly?
0:54
Thank you.
0:55
So the first legal error the District Court made in excluding Mr. Block's testimony
0:59
is that it applied a categorical rule that revenues from non-accused products
1:04
can never be included in the royalty base for a reasonable royalty analysis.
1:09
Exifer submits that that is not consistent with this Court's precedent.
1:13
In Section 284's command, the damages be adequate to compensate for the infringement.
1:20
So from this Court's precedent, the foundational principle in a damages analysis
1:24
is determining what the value of what was taken, the value of the use of the patented invention.
1:31
In this case, Microsoft's use of the patented invention was its use of the VFP FastPath,
1:38
and Spartanet Technologies—
1:39
Judge Stoll
I want to ask you a question.
1:40
I mean, we have some cases like Enplas that have, like, what sounds like, I suppose,
1:45
a categorical rule that you cannot base damages on non-infringing products.
1:53
And then we have maybe some other cases where there might be, you know,
1:56
there's different alternative ways to measure damages,
1:59
like a cost-savings approach or something like this.
2:02
What would you say the rule is for when someone, a damages expert,
2:08
can reasonably rely on or base the estimated reasonable royalty
2:16
on a non-infringing product, sales of a non-infringing product?
2:20
Appellant Attorney
The rule that we would advance here is something similar to what this rule set forth in the Brumfield case,
2:26
where it rejected a categorical rule that foreign conduct could not—
2:32
that reasonable royalty damages could not be based on foreign conduct.
2:36
So here—
2:38
What we are trying to do is—
2:39
Judge Taranto
It could, as long as there was an adequate causal connection to, between the infringement and the gain.
2:48
Appellant Attorney
That's correct.
2:49
What Brumfield said was, you know, the foundational principles, this value of what was taken,
2:54
were trying to value the use of the patent and invention.
2:57
And when you're looking at hypothetical negotiation,
2:59
you're trying to value how the parties will look at it at that time.
3:02
And part of that analysis under Brumfield was taking a look at the relationship
3:06
between the non-infringing—
3:08
the infringing activities and the infringing activities.
3:10
And in Brumfield, this court found that when there's a causal relationship,
3:14
and it gave a great example of what that means that is applicable here,
3:19
when that infringing activity enables otherwise unavailable profits from, in that case, the foreign conduct.
3:28
Judge Stoll
So the expert would have to have factual information to reasonably rely on, you know,
3:34
in order to satisfy Daubert, right?
3:37
Correct.
3:38
Appellant Attorney
So there would be—
3:38
Judge Stoll
And there also would have to be a correct methodology, right?
3:41
Appellant Attorney
I'm sorry, I'm correct.
3:42
Judge Stoll
A correct methodology.
3:43
They would have to have—you know, I think you're talking about methodology, really, maybe.
3:47
And it's—and I think about Daubert, I think about that the expert has to be able to rely on—
3:52
there has to be some basis, factually, to support what the expert is saying.
3:57
And also, they have to have a proper methodology, right?
4:00
Appellant Attorney
I agree with you 100%.
4:02
Under Rule 702, there's methodology and there's sufficient facts of data.
4:05
Okay.
4:06
So he would have to have—any expert—
4:08
damage expert to meet this threshold that we're talking about in Brumfield would have to have evidence.
4:13
Evidence of an economic nexus, this causal relationship between the non-infringing activities—
4:19
And so Mr. Locke was trying to testify, if I understand it right,
4:22
Judge Moore
that the VFP CPUs, which are the patented and claimed device, resulted in a substantial—
4:29
I won't give the number because I know that it's confidential—
4:32
but a substantial increase in VM hour production.
4:35
Because basically, he—
4:38
the patentee invented something that made stuff work a lot faster.
4:42
And so he's figured, how do you value that?
4:44
It's not a standalone product, doesn't sell,
4:46
so he valued it by looking at how many hours were ultimately produced, right?
4:52
Appellant Attorney
That is 100% correct, as he put it in his—the but four hours.
4:55
So you have the VFP FastPath, and you have the SmartNIC technology.
4:59
And when Microsoft, at the time of the hypothetical negotiation,
5:02
was implementing this technology into its Azure cloud system—
5:06
And it was Microsoft's own documents.
5:07
Judge Moore
—that established the improvement that this technology would provide in VM hours, correct?
5:14
Appellant Attorney
That is 100% correct, Your Honor.
5:15
We've laid that out in the brief, and that was not—
5:18
Judge Moore
Do you want to save time for rebuttal?
5:20
Appellant Attorney
Okay. Thank you, Your Honor.
5:21
Oh, wait. Could I ask you a quick housekeeping question?
5:24
Judge Stoll
I'm sorry.
5:26
A lot of things in Mr. Locke's report are designated as confidential.
5:30
And some of them probably are still confidential,
5:32
but others seem like, why are these being indicated as confidential?
5:36
For example, on page A122—
5:37
It appears that a factor from Georgia-Pacific is designated as confidential.
5:45
Has there been any review of these kinds of things,
5:48
and what's confidential and what's not,
5:49
to try to narrow it down so the court can do its job?
5:52
Appellant Attorney
There was, at some point in this briefing,
5:55
that the court came back and asked Microsoft to designate—
5:57
because Mr. Locke's report, obviously, is mostly Microsoft's confidential information.
6:01
So we had them take a look at it.
6:03
I believe in the appendix, most of it was still marked confidential,
6:07
as it was in the understatement.
6:07
I mean, the sentence I'm talking about says,
6:09
Judge Stoll
in Georgia-Pacific, the court held that the determination of reasonable royalties—
6:13
maybe I shouldn't read this, but it goes on,
6:15
and it says, with the Georgia-Pacific court held.
6:18
And so I'm wondering why that's designated as confidential.
6:21
Appellant Attorney
I agree with you. That should not be confidential.
6:23
And we're happy to work with Microsoft
6:24
and try to get some of that cleaned up for the court
6:27
so you know, for your opinion, what—
6:29
Judge Taranto
Don't we still have a rule, maybe even in FRAP itself,
6:34
that requires the parties to get—
6:37
together to review overconfidential—
6:41
overmarking of material as confidential?
6:44
Appellant Attorney
And we did, and that did happen earlier on in this case.
6:47
Judge Taranto
It might be worth a second shot with respect to the actual report.
6:52
Appellant Attorney
Certainly, Your Honor.
6:53
We will definitely work with Microsoft to take a look more through the appendix
6:57
and make sure that we de-designate some of that
7:00
so the court can have that information for its opinion.
7:03
Thank you very much.
7:05
Judge Moore
Okay. Ms. Punsacker?
7:06
Appellee Attorney
Thank you, Your Honor.
7:11
May it please the court, Kelly Hunsaker on behalf of Microsoft.
7:14
Exeper lost this case because it made a series of deliberate choices
7:18
in a singular pursuit of an ultimately invalid damages theory.
7:23
In doing so, it abandoned alternative approaches
7:27
and left the record with no evidence, no methodology,
7:32
and no roadmap from which a jury could determine
7:36
a non-speculative, non-zero royalty.
7:40
With its only damages theory excluded—
7:43
Judge Taranto
Let's—why don't you just stick at what?
7:45
Supporting the first part.
7:46
If we disagree with the first part, we don't need to get to the second part.
7:51
Appellee Attorney
With respect to the summary—
7:52
Judge Taranto
With what you were about to say, that without anything else,
7:55
then the judge can end the case.
7:56
Forget about that for now, and just talk about
7:59
why you think the exclusion of his testimony was proper.
8:06
Appellee Attorney
Yes, Your Honor.
8:07
So, with respect to—
8:09
There are two categorical rules versus alternate ways of calculating damages.
8:15
The idea that unpatented products may not be part of a royalty base
8:20
in a running royalty, a usage-based royalty,
8:24
goes all the way back to Garrison v. Clark.
8:27
Judge Taranto
So, these are method claims, right?
8:29
Appellee Attorney
There are method claims and there are system claims.
8:33
Judge Taranto
So, what would be an unpatented product in a method claim?
8:38
Appellee Attorney
Virtual networks are a separate product.
8:41
Azure has 200 different products and services.
8:44
Virtual networks are a separate product.
8:47
VFP lives entirely in virtual networks.
8:51
The source code for VFP is entirely in virtual networks.
8:56
Judge Taranto
You're talking about a name with a capital of E and a capital N,
8:59
not kind of common language words.
9:00
Appellee Attorney
It's a category of products.
9:02
There's actually four different types of virtual networks,
9:05
but it's a category of products.
9:07
It's a different line of business.
9:08
It's a different line of business than the compute group,
9:10
which is where virtual machines live.
9:12
Judge Taranto
Well, I guess, just to get back to the affirmative,
9:15
my understanding is Mr. Block said that as a result of the practicing of this method,
9:23
Microsoft was able to sell many more hours,
9:28
and he's trying to just figure—
9:32
and then he made an estimate of the increment
9:36
of the additional hours.
9:38
Of the thing that, actually, Microsoft gets money for and then allocate—
9:45
figured out what the profit level was on that
9:48
and then allocated that profit between the two parties.
9:52
And then, kind of, sort of at the end, said,
9:55
I'll just translate that into a base and a, you know, per unit.
10:01
But why is that not reasonable and economically sound?
10:06
Because all that—
10:08
Appellee Attorney
All that Mr. Congdon did
10:11
and all that Mr. Block did in his damages series
10:13
was show a functional relationship between a computer and a network.
10:17
If this isn't the virtual world,
10:19
we're talking about a computer as the virtual machine
10:22
and a whole network as the virtual networks.
10:26
Judge Moore
And so—
10:27
Well, Mr. Congdon's testimony was not struck,
10:31
and his testimony was that the VFP FastPath provided X—
10:36
because I'm not going to say the number—
10:37
X.
10:38
Improvement in VFP CPUs,
10:41
which is directly correlated to the increase in VM hours.
10:45
So what's—I don't—
10:46
If you have a method of manufacturing
10:48
and it results in you producing, I'll just say, a random number,
10:51
20% more product in an hour,
10:54
why can't the measure of damages be focused
10:57
on the additional products that were produced?
11:00
Appellee Attorney
Because, Your Honor,
11:01
unless the entire market value rule applies,
11:05
unless the patented feature drives customer demand,
11:08
for the whole system that you're drawing the circle around—
11:12
Judge Moore
Microsoft's own documents expressly said
11:15
how many additional VM hours it thought it would achieve
11:20
by utilizing this exact product.
11:23
Appellee Attorney
It actually did not, Your Honor.
11:25
What it said was it anticipated a 50% increase—
11:29
Judge Moore
That's the number you're not supposed to say.
11:31
That's the confidential number.
11:33
That's why we keep saying X.
11:34
Judge Stoll
I apologize.
11:36
It's your number, but—
11:37
You would answer the confidential—
11:38
Do you want to answer the housekeeping question
11:40
and tell us that nothing in here is confidential?
11:44
Appellee Attorney
The vast majority of it is we can de-designate.
11:47
I thought we redacted very lightly.
11:50
Judge Stoll
It makes it very hard for us to have a conversation with you
11:53
when you're able to say it out loud
11:54
because you know what's confidential and what's not,
11:56
yet we can't.
11:58
So could you tell us what is confidential and what's not?
12:01
Appellee Attorney
You can assume it's not confidential
12:02
for purposes of this argument.
12:06
Judge Stoll
Okay, so does that mean nothing's confidential
12:09
for purposes of—
12:10
For purposes of this argument?
12:11
Appellee Attorney
Your Honor, a lot of this dates back 15 years,
12:15
and so when we went back and did the redactions—
12:21
Judge Stoll
Just a conclusive, clear answer would be really helpful.
12:24
Appellee Attorney
Yes, I believe you can speak to anything in the record.
12:27
Okay.
12:28
Judge Moore
All right, well, okay,
12:29
so let's get back to the merits of the point then.
12:32
Microsoft documents suggested a potential fit,
12:35
or at least Dr. Congdon testified
12:38
that there would be a 50% improvement
12:40
in VFP CPUs,
12:43
which can directly correlate to an increase
12:44
in the number of VM hours on the Azure platform.
12:47
Appellee Attorney
And completely conclusory.
12:49
There is no substance, there is no evidence,
12:52
there is no basis for that correlation.
12:55
That's not the issue.
12:55
Judge Moore
The issue here, that expert was not excluded,
12:57
and you have not challenged on appeal
12:59
the failure to exclude that testimony.
13:01
So why—that is a factual statement
13:03
that you have not challenged on appeal.
13:06
Okay.
13:06
So why is it wrong for Mr. Block to accept that—
13:10
that factual statement,
13:10
which is not challenged on appeal, as true,
13:12
and then base his methodology the way he did?
13:15
Appellee Attorney
Because these are different products.
13:17
One of those products is a network,
13:19
one of those products is a computer.
13:22
And under the rule of apportionment—
13:24
Judge Stoll
You don't sell the computer.
13:25
Or you don't sell one of those things.
13:27
I mean, how else would they value their invention?
13:30
You're just complaining about the methodology, right?
13:33
I mean, you have to agree
13:34
that there is a factual premise here on the record.
13:39
You're just saying,
13:40
even if there is a factual premise
13:41
for valuing the invention this way,
13:44
that it's per se improper to do so.
13:49
Appellee Attorney
I believe it is per se improper
13:51
to use an unpatented, unaccused product
13:56
as a royalty base in a running royalty.
13:59
What the case law says is that you can consider it.
14:01
You can consider it in the rate.
14:03
You can consider it in the Georgia-Pacific factors.
14:07
But what you can't do is create a tax
14:11
for a running royalty on an unpatented product.
14:16
Judge Taranto
So, I guess my recollection,
14:19
and just you'll correct me,
14:21
is that Dr. Block kind of ended up phrasing
14:28
his dollar amount as of the close of discovery in 20—
14:33
the close of the damages period
14:36
that was subject to discovery, which is 2020.
14:40
He did a calculation.
14:42
He did a calculation on overall quantities
14:44
and then translated that—
14:47
I think their term was—
14:48
expressed it as, say, a running royalty.
14:52
But it was a fixed dollar amount.
14:54
So, why are—
14:56
we don't have a running royalty in front of us.
14:59
We do.
15:00
Appellee Attorney
His royalty was a two and a half cent
15:04
per virtual machine hour running royalty.
15:08
Judge Taranto
Because he just took the total numbers
15:12
of the division at the end
15:13
after justifying the analysis
15:16
in terms of the total numbers.
15:18
Appellee Attorney
He took the total virtual machine revenues.
15:21
He divided them by the average selling price
15:24
of virtual machine hours
15:26
to arrive at a number of virtual machines.
15:29
Then he assumed that 50 to 100 percent
15:32
of those virtual machine hours
15:34
were attributable solely to the patent in suit.
15:38
That was how he arrived at the message—
15:40
the number.
15:42
And that is based on a running royalty
15:45
for a product that is not accused of infringement.
15:47
In every case, you have to separate
15:49
the patented and unpatented components.
15:52
And he did not do that.
15:53
Virtual machines don't infringe
15:55
by using another component.
15:57
Judge Moore
How do you do that for method claims?
15:59
What is the product in a method claim?
16:02
Appellee Attorney
Virtual networks.
16:04
It's sold by Microsoft.
16:06
The only thing that's not sold
16:07
is the VFP component of virtual networks.
16:10
Judge Moore
Forget about this case.
16:11
A method of manufacturing.
16:13
Are you saying that it would be improper—
16:15
just a regular method of manufacturing—
16:17
it would be improper to use
16:19
the product produced by that method
16:21
in order to assess a royalty?
16:23
Appellee Attorney
It's not a product produced by the method.
16:25
Judge Moore
But I'm asking you as a matter of law.
16:28
In a simple case,
16:30
method of manufacturing results in a single product.
16:33
Do you think a damages expert
16:34
could not use that product
16:37
for its royalty analysis?
16:41
Appellee Attorney
It's not a method of manufacturing.
16:43
So the end—
16:44
Judge Moore
You're fighting a hypothetical.
16:46
Please don't fight a hypothetical.
16:48
Appellee Attorney
Okay.
16:50
May I ask you to clarify the question, please?
16:54
Judge Moore
How do you—
16:56
I'm trying to get to—
16:57
What I'm trying to point out to you is
16:59
there are many instances in which
17:02
the measure of damages,
17:04
the royalty base,
17:05
is on something that is not necessarily
17:07
the claim thing, because in a method of manufacturing,
17:10
you can't do that.
17:11
In a method of manufacturing,
17:13
you have to put the royalty base
17:16
on the product produced by the method,
17:19
which may not itself be patented,
17:21
the product.
17:22
So there are instances
17:24
when an expert can look to,
17:27
for a royalty base,
17:28
a product that is the product of a method,
17:32
and then use the number of products
17:34
produced by that method
17:37
as the royalty base.
17:38
And I'm kind of wondering,
17:39
do you think there's something wrong with that,
17:41
theoretically?
17:42
Because you want a per se rule,
17:44
but I don't see how a per se rule applies
17:46
when there are method claims.
17:51
Appellee Attorney
A per se rule applies
17:53
to apply the rule of apportionment.
17:56
You have to tie
17:58
the award of damages
17:59
to the infringement.
18:01
What infringes is the claims.
18:04
Those claims reside in a different product
18:06
that is sold
18:07
by the networking services division.
18:10
It's not the virtual machines.
18:11
It's not the virtual machines
18:13
that include it.
18:14
If you ask for the source code
18:16
of virtual machines,
18:17
you will find VFP nowhere.
18:18
If you ask for the source code
18:20
for virtual networks,
18:21
that's where it lives.
18:23
That product is sold.
18:24
It's sold in four different implementations.
18:27
Dr. Congdon examined all of those.
18:29
And instead of relying
18:31
on the smallest saleable patent practicing unit,
18:34
which this court's cases say is required,
18:40
they didn't look to networking services revenue
18:43
because it was too small.
18:45
Judge Stoll
Can I ask you a question?
18:46
I mean, okay.
18:46
So I see your briefing
18:51
as really emphasizing N-class
18:54
and other cases
18:55
and advocating for a per se rule
18:57
that there can never be
19:00
a royalty award provided
19:03
based on a non-infringing product,
19:06
even when it's a method claim.
19:07
That's what I see you saying.
19:09
I don't see a lot of emphasis
19:10
on apportionment,
19:11
like the argument you're making right now.
19:14
And I'm not sure if I agree with you.
19:17
There wasn't apportionment here anyway.
19:19
That's a separate issue.
19:21
But tell me where you're talking
19:22
about apportionment in your brief.
19:27
Appellee Attorney
In the sense of apportioning
19:29
a single product between patented
19:32
and unpatented components,
19:33
we are not suggesting apportionment
19:36
in that respect.
19:38
With respect to the competition
19:41
concept of not using unpatented products
19:46
as the royalty base,
19:49
doctrinally, we believe that that comes
19:51
from 140 years of case law.
19:55
And we believe that that's inherent
19:57
in Section 284.
19:59
Judge Stoll
Sure.
20:01
Now, can I go back to Judge Moore's,
20:03
Chief Judge Moore's hypothetical?
20:05
I don't know if I heard you answer that,
20:07
but you are aware of cases that say
20:09
where awards damages
20:10
have been awarded on method claims
20:13
when those method claims are based
20:14
on the product that is produced, right?
20:17
Appellee Attorney
If the method claims are being infringed
20:20
by a user, that user is using
20:23
the virtual network.
20:25
That user isn't using the virtual machine.
20:27
So the user...
20:29
Judge Stoll
You're not going to answer the question.
20:31
My question was, do you agree that
20:35
there's cases, or hypothetically,
20:38
somebody who, a party that,
20:42
manufactures, uses a method
20:43
to manufacture a product,
20:45
that there could be a royalty
20:46
based on the sales of the product?
20:49
Appellee Attorney
So, Your Honor,
20:50
I do understand the question.
20:52
Exifer did not come forward
20:54
with any cases in that hypothetical.
20:59
They did not demonstrate that...
21:03
So you just don't know
21:04
the answer to the question?
21:05
I don't know the answer
21:06
to the question.
21:07
It's not a method of manufacture.
21:10
Conceptually, you know,
21:11
you're telling me that doctrinally...
21:14
Your Honor, you can move on.
21:15
Judge Stoll
Okay.
21:15
Okay.
21:23
Appellee Attorney
Would...
21:24
If there's no further questions
21:26
regarding the exclusion order,
21:29
I'd like to turn to the summary judgment.
21:37
With Exifer's only damages theory excluded,
21:40
the question is what was left,
21:42
and was there enough evidence
21:44
in the summary judgment record
21:46
for a jury to determine
21:49
a reasonable royalty award
21:51
without speculation,
21:53
and guesswork?
21:54
And in the summary judgment record,
21:58
there was no way...
22:00
There was no way for any jury
22:03
to arrive at a damages number.
22:06
There was no structure to a royalty.
22:09
There was no methodology,
22:11
no base, no rate,
22:13
absolutely no way for a jury
22:17
to formulate a reasonable royalty
22:20
based on the evidence.
22:21
And under a plain application,
22:23
of Rule 56,
22:25
we think that granting summary judgment
22:27
was the only choice that the District Court had
22:30
based on the Court's case law.
22:32
Judge Moore
Okay.
22:32
Thank you, Ms. Fetker.
22:34
Ms. Bernard,
22:35
you have some rebuttal time.
22:40
Appellant Attorney
Thank you, Your Honor.
22:41
Exifer doesn't have anything more
22:43
to add on rebuttal
22:44
unless you have some additional questions.
22:46
Judge Taranto
You just heard your friend
22:48
on the other side,
22:49
or at least I think I heard,
22:50
say that the claimed method
22:52
is not used in the manufacture
22:56
of what Microsoft sells,
23:00
VM time,
23:01
if that...
23:02
I don't...
23:04
That may not be the correct description,
23:07
but the thing that it sells,
23:09
you know,
23:10
sort of timeshare on their servers
23:12
for something.
23:13
Is that right?
23:14
Wrong?
23:15
What?
23:15
Appellant Attorney
The use of the patented invention
23:17
by Microsoft
23:19
is the VFP FastPath
23:21
and SmartNet technology.
23:23
And what that technology does
23:25
is it adds efficiencies
23:26
to the networking.
23:27
So it's how it processes the data
23:29
that's going through the network.
23:30
And those efficiencies
23:32
are cost savings
23:35
in the number of CPUs
23:36
that are used for networking
23:37
in a server.
23:38
And so that's the direct correlation
23:40
between the cost savings
23:42
and then the value
23:43
of those cost savings
23:45
per Microsoft's own contemporaneous
23:47
business documents of 2014.
23:49
That value was measured
23:50
by the additional VMs
23:52
that you could add per server,
23:53
leading to VM hours
23:55
used by the customers
23:56
and then leading to revenue.
23:57
Judge Taranto
So it's a slightly more complicated
24:03
causal connection
24:04
than saying,
24:05
I have a method
24:06
for making ketchup.
24:08
Put the tomatoes in first
24:10
and then the sugar,
24:11
and boy,
24:11
it goes a lot faster
24:13
and we can now make
24:14
lots more ketchup.
24:16
Appellant Attorney
Perhaps.
24:16
But we submit
24:17
it is a really direct economic nexus
24:20
and causal relationship
24:21
between the use
24:22
of the patented invention,
24:23
which is what we're trying
24:25
to get damages for here,
24:26
nothing more,
24:27
and the extra VMs
24:29
that are put on the server
24:30
and the resultant extra VM hours
24:33
from the customers.
24:35
All right.
24:36
Thank you, counsel.
24:37
This case is taken
24:37
under submission.