EXAFER LTD v. MICROSOFT CORPORATION (2024)

ORDER

Microsoft Corporation's Motion to Exclude Expert Opinions of Mr. Justin R. Blok and Dr. Paul Congdon Regarding Damages (Dkt. 152), Exafer Ltd.'s Response (Dkt. 155), and Microsoft's Reply (Dkt. 160) are before the court.¹ Having considered the parties' briefs, the applicable law, the entire docket, the undersigned enters the following order.

I. BACKGROUND 2

Exafer accuses Microsoft of infringing its U.S. Patent Nos. 8,325,733 (the '733 patent) and 8,971,335 (the '335 patent). The '733 patent “describes method and system for forwarding frames of a flow via a layer 2 forward and manipulator (L2FM) for improving network utilization and improving users experience by reducing the latency associated with the flow.” '733 patent Abstract. The '335 patent is directed to optimizing, controlling, manipulating, and creating the best traffic paths for data flow in a network. Thus, both patents describe ways to optimize data transmission efficiency within a network.

Microsoft moves to exclude the testimony of Exafer's damages expert, Mr. Blok, and Exafer's technical expert, Dr. Congdon, to the extent that Mr. Blok relies on Dr. Congdon's analysis to support Exafer's damages theory. Microsoft argues that Exafer cannot meet its burden to show by a preponderance of the evidence that the testimony of its experts is relevant, reliable, or admissible under Rule 702.

II. RULE 702 STANDARD

Rule 702 provides:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if the proponent demonstrates to the court that it is more likely than not that:

(a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;

(b) the testimony is based on sufficient facts or data;

(c) the testimony is the product of reliable principles and methods; and

(d) the expert's opinion reflects a reliable application of the principles and methods to the facts of the case.

Fed. R. Evid. 702. Rule 702 was amended effective December 1, 2023 to clarify that the proponent bears the burden of showing the expert testimony more likely than not complies with the rule and to emphasize that an expert opinion must reflect a reliable application of the expert's methodology. In re Onglyza (Saxagliptin) & Kombiglyze (Saxagliptin & Metformin) Prod. Liab. Litig., 93 F.4th 339, n.4 (6th Cir. 2024).

For expert testimony, the trial judge plays a “gatekeeping role,” which “entails a preliminary assessment of whether the reasoning or methodology underlying the testimony is scientifically valid and of whether that reasoning or methodology properly can be applied to the facts in issue.” Apple Inc. v. Wi-LAN Inc., 25 F.4th 960, 971 (Fed. Cir. 2022) (citing Daubert, 509 U.S. at 597, 592-93). The focus “must be solely on principles and methodology, not on the conclusions that they generate.” Id. (quoting Daubert, 509 U.S. at 595). “[A] reasonable or scientifically valid methodology is nonetheless unreliable where the data used is not sufficiently tied to the facts of the case.” Id. (quoting Summit 6, LLC v. Samsung Elecs. Co., 802 F.3d 1283, 1296 (Fed. Cir. 2015)). Likewise, “ideal input data cannot save a methodology that is plagued by logical deficiencies or is otherwise unreasonable.” Id. (quoting Summit 6, 802 F.3d at 1296). But where the methodology is reasonable and its data or evidence are sufficiently tied to the facts of the case, the gatekeeping role of the court is satisfied. Id.

III. PATENT DAMAGES

Upon a finding of infringement, “the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.” 35 U.S.C. § 284. The most common method for determining a reasonable royalty is the hypothetical negotiation approach, which “attempts to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began.” VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1326 (Fed. Cir. 2014) (citing Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009)). A reasonable royalty may be a lump-sum payment not calculated on a per unit basis, but it may also be, and often is, a running payment that varies with the number of infringing units. Id. In that event, it generally has two prongs: a royalty base and a royalty rate. Id.

No matter what the form of the royalty, a patentee must take care to seek only those damages attributable to the infringing features. Id. Indeed, the Supreme Court long ago observed that a patentee

must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative; or he must show, by equally reliable and satisfactory evidence, that the profits and damages are to be calculated on the whole machine, for the reason that the entire value of the whole machine, as a marketable article, is properly and legally attributable to the patented feature.

Id. (quoting Garretson v. Clark, 111 U.S. 120, 121 (1884)). Courts are cognizant of the difficulty that patentees may face in assigning value to a feature that may not have ever been individually sold and absolute precision is not required. Id. at 1328. However, a patentee's obligation remains to apportion damages only to the patented features. Id. at 1329.

IV. ANALYSIS

Exafer accuses Microsoft's Azure network's “VFP Fastpath” and “SmartNIC Accelerated Networking” (collectively, the Accused Features) of infringement. Azure is Microsoft's cloud computing platform that offers products and services to build, deploy, and manage applications on any device. The Accused Features impact the efficiency at which data is transmitted on the Azure network. One service Azure offers is “virtual machines” (VM), which are software representations of physical computers that run on Azure servers hosted in the Azure cloud. Exafer does not accuse VMs—which Microsoft offered before it implemented the Accused Features—of infringing either patent. However, Exafer's technical expert, Dr. Congdon, contends that the Accused Features create efficiencies that enable Microsoft's servers to host more VMs.

Both sides agree that Microsoft does not directly charge for the Accused Features. Accordingly, relying on the premise that the Accused Features allow Microsoft to achieve more VMs on a server, Exafer's damages expert, Mr. Blok, values the Accused Features based on the amount of VMs on the network. Specifically, Blok opines:

My analyses relating to a reasonable royalty rate for a license to the Patents-in-Suit in this matter is based on a hypothetical negotiation between Exafer and Microsoft that would have occurred on or about the time of first infringement (i.e., January 2014)․ [I]t is my opinion that the parties would have agreed upon a reasonable royalty for rights to the Patents-in-Suit of no less than $0.0247 per virtual machine hour Microsoft sold in connection with the Accused Platform. As a result of applying a per-hour royalty rate of $0.0247 to the total number of virtual machine hours Microsoft sold as of December 2020 ․, I have calculated reasonable royalty damages owed to Exafer for Microsoft's alleged infringement of the Patents-in-Suit to be approximately $211.1 million.

Dkt. 152-2 (Blok Report) ¶ 7 (footnotes omitted). Microsoft objects to this valuation theory, arguing that it is impermissible to base damages on VMs, which are unaccused technology. Even if Exafer is allowed to base its damages theory on VMs, Microsoft asserts a myriad of reasons for why Exafer's damages theory is so flawed it should be struck.

Microsoft first argues Exafer's damages model is fundamentally flawed because it uses unaccused VMs as the royalty base. See Enplas Display Device Corp. v. Seoul Semiconductor Co., 909 F.3d 398, 411 (Fed. Cir. 2018) (“[A] reasonable royalty “cannot include activities that do not constitute patent infringement, as patent damages are limited to those ‘adequate to compensate for the infringement.’ ”) (quoting AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1343 (Fed. Cir. 2015) (quoting § 284)). Exafer argues that its damages theory follows Microsoft's perspective at the time infringement. See Interactive Pictures Corp. v. Infinite Pictures, Inc., 274 F.3d 1371, 1384 (Fed. Cir. 2001) (“the [hypothetical] negotiation must be hypothesized as of the time infringement began”). Thus, both parties rely on basic principles of patent-damages law to sustain their position.

Exafer contends that at the time infringement began Microsoft valued the Accused Features by the extent to which they could increase the amount of VMs offered on a server. Exafer cites to various presentations on the technology positing this benefit. See Dkt. 155 at 10 n.1 (citing exhibits). Thus, Exafer argues that at the hypothetical negotiation, Microsoft would have negotiated with this in mind. Exafer does not directly respond to the cases cited by Microsoft holding that it is improper for unaccused technology to form the royalty base. Exafer cited no case holding that the royalty base could entirely consist of unaccused technology.

Most closely on point is the Enplas case relied on by Microsoft. Enplas, 909 F.3d at 398. In Enplas, the jury's damage award was based on a “freedom-to-operate” payment, meaning the damages award included payment for infringing products and potentially infringing products so that defendant would be insulated from any infringement claims for any other products. Id. at 409-11. Over defendant's objection, plaintiff's damages expert testified that at the hypothetical negotiation the parties would not have limited the license to just the accused products if there were a risk of infringement by manufacturing other similar products. Id. at 409. Relying on a prior opinion, the Federal Circuit vacated the damages award because “[t]he royalty base for reasonable royalty damages cannot include activities that do not constitute patent infringement, as patent damages are limited to those ‘adequate to compensate for the infringement.’ ” Id. at 411 (quoting AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1343 (Fed. Cir. 2015) (quoting 35 U.S.C. § 284). Similarly, Exafer uses sales of VMs—which are not accused of infringement—as the royalty base to determine damages. Exafer does not distinguish Enplas or any of the many cases that Microsoft cited on this point. Exafer has failed to meet its burden to show that Mr. Blok's damages theory is based on a sufficiently reliable methodology such that it should go before a jury.

As this issue is dispositive of Microsoft's motion, the court does not reach Microsoft's remaining arguments. For the reasons above, the court excludes the expert testimony of Mr. Blok on damages. The court declines to strike paragraphs 108-126 of Dr. Congdon's report because he does not opine that VMs should serve as the royalty base.

V. CONCLUSION

Accordingly, for the reasons given above, the court GRANTS Microsoft Corporation's Motion (Dkt. 152) to the extent it seeks to exclude the expert Opinions of Mr. Justin R. Blok and DENIES the Motion as to Dr. Paul Congdon's opinion.

FOOTNOTES

1.   United States District Judge Robert Pitman referred this matter to the undersigned for resolution as to the merits pursuant to 28 U.S.C. § 636(b)(1)(A), Rule 72 of the Federal Rules of Civil Procedure, and Rule 1(c) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas. See Text Order dated November 27, 2023.

MARK LANE UNITED STATES MAGISTRATE JUDGE