On March 6, 2026, the Federal Circuit issued a precedential opinion in the case of Exafer Ltd. v. Microsoft Corporation (No. 24-2296) reversing a district court’s exclusion of the patent owner’s damages expert’s opinion. A patent owner who successfully obtains a verdict of liability is entitled to “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 patent owner almost universally presents its case for damages through an expert witness who provides an economic analysis of the rationale for the patent owner’s damages request. Having a damages expert’s opinion excluded is devastating and frequently case dispositive, as it was in this case because the district court also granted a motion for summary judgment based on the absence of a remedy. What was the district court’s reason for excluding the opinion and why did the Federal Circuit say the district court got it wrong?


Even if patent litigation is not your primary practice area, given the language of 35 U.S.C. § 284 your intuition is probably telling you that damages for patent infringement should be connected somehow to the invention in the asserted patent. That intuition is correct: “the governing rule is that the ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more.” Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014). A key point of tension in patent litigation is over what should form the royalty base. In a case in which the patent owner accuses a device or system of infringing, what parts of it are connected enough to the patented invention so that it would be fair to attribute the economic activity associated with those parts to the patented invention?


This tension played out in the district court in this case. Exafer’s expert used revenue associated with virtual machines (“VMs”), components not accused of infringing, as the royalty base. Microsoft objected to the “application of a royalty rate to sales of unaccused VMs,” reasoning that the caselaw “prevents [Exafer] from expanding its patent monopoly to unpatented products.” Exafer Ltd. v. Microsoft Corporation, No. 24-229, slip op. at 7 (Fed. Cir. Mar. 3, 2026). Now this may seem to be a slam dunk. The VMs were not even infringing. How could Exafer think it should get a piece of the VM sales as a royalty?


A full treatment of convoyed sales and similar collateral economic issues is beyond the scope of this post. But the general principle is that when there is economic activity generated by infringing a patent, not all that economic activity necessarily relates directly to the sale or use of infringing articles. There could be related economic effects, such as the sale of non-infringing articles that a defendant bundles with the infringing articles, or cost savings that a defendant would not have realized but for its infringing activities. That collateral economic activity can be part of the picture of what the use of the patented invention is worth to the defendant, and therefore what it would have been willing to pay had it sought a license instead of infringing. Analysis of this hypothetical license negotiation forms the core of a patent damages opinion. So, if there was economic activity tied to the VMs that Exafer could attribute to the patents, even if the VMs themselves did not infringe the patents, the VMs could potentially form part of the damages analysis.


The Federal Circuit held that Exafer had sufficiently connected the dots between its patents and the VMs. Exafer’s technical expert set up the damages opinion by opining that the network optimization and efficiency improvements achieved by the claimed inventions allowed Microsoft to operate more VMs on a single CPU and thus sell more VMs without the need for additional network infrastructure. Exafer at 8. Exafer’s damages expert used the incremental benefit of increased VM density to construct a damages model based on the additional sale of VM-hours Microsoft was able to realize due to the patented inventions. Id. The Federal Circuit said this was justified because “Microsoft’s own documents demonstrate that [Exafer’s damages expert] Mr. Blok’s VM-hour royalty base was based on a causal connection between the Accused Features of the Azure Platform and VMs.” Exafer at 6.


In contrast, the caselaw the district court and Microsoft relied on, Enplas Display Device Corp. v. Seoul Semiconductor Co., 909 F.3d 398 (Fed. Cir. 2018), involved a damages model that included products that “had no causal connection to the accused infringing products such that the royalty base improperly included activities that do not constitute patent infringement.” Exafer at 6 (citation modified). In other words, Enplas does not stand for a blanket rule that a patent owner cannot include non-infringing products in the royalty base.


Practice Tips: When representing a patent owner, establishing a technical basis for a causal connection to support this type of analysis may be time intensive, but possibly the least of your worries. Attempts to get discovery of internal financial, marketing, or business analyses of admittedly non-infringing activities will often be met with an accusation that you are “fishing.” The process of gathering this type of information should begin early and be bolstered by as much open source and proprietary information as possible, because it may require motion practice to convince a magistrate or district judge that you are entitled to the requested discovery.


When working on the defense side, you must poke holes in the purported technical nexus between the alleged infringing acts and the economic activity due to non-infringing activities. Also push hard for written discovery on the factual basis for a patent owner’s theory that non-accused activities should be part of the royalty base, even when met with an objection that the request is premature because it is the domain of expert opinion. The defendant is entitled to know the facts an expert will base his or her opinion on without waiting for a written report.