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For Texas Bankruptcy Attorneys,

December Could be the Calm Before the Storm

 

What’s happening: 

 

As the year comes to an end, we can see the deep impact of the COVID-19 pandemic on the economy, says Joseph Acosta, a bankruptcy partner at the international law firm Dorsey & Whitney in its Dallas office. 

 

Thus far, distress and restructuring activity has centered primarily on a cluster of industries directly affected by government lockdowns, such as retail, food and beverage, travel, automotive and oil & gas, rather than the entire economy, says Acosta.  

 

“Business filings were up 46% in November, but have slowed somewhat in December, making it the highest level since 2010,” Acosta said. 

 

“Consumer filings dropped in November by 39%,” he said. “For the entire year, the total filings through the end of November were at historic lows, but this is largely attributable to the Federal Reserve pouring money into the financial markets and the $2.3 trillion stimulus package by the government earlier this year.”

 

“These measures temporarily improved the credit and cash position of both businesses and consumers," Acosta says.

 

What this means for Texas bankruptcy attorneys: 

 

The lower consumer filings might have impacted consumer bankruptcy lawyers slightly, says Acosta. But the business filings have kept chapter 11 practitioners busy, and this trend is likely to continue into 2021, because corporate financial distress is likely to continue according to many leading experts, including NYU Professor Ed Altman, who invented the "Z-score" on how to measure whether companies are vulnerable to bankruptcy, and MIT Sloan Professor David Thesmar, who estimated that U.S. corporations owe approximately $10.5 trillion to creditors.  

 

“Also keep in mind, whether business filings pick up or not, Chapter 11 practitioners will still be busy trying to find solutions for distressed companies and their creditors," Acosta said. 

 

What should bankruptcy attorneys be doing to bolster their practices and expand them: 

 

Per Acosta:

 

"Chapter 11 practitioners need to listen to their partners and colleagues for signs of client distress and provide helpful advice when asked. If there is any lull in activity in December, this is really the calm before the storm. Of course, all major firms have been looking to expand their bench strength, and most have done so by now.  

 

Consumer practitioners should also be prepared for a wave of bankruptcies due to high unemployment rates, more corporate layoffs and as government stimulus packages wind down.  Already, the amount of the next expected stimulus package is less than half of what the CARES Act brought in 2020.  So, there are likely to be some tough times in 2021," Acosta says. 

 

What are the most difficult questions to anticipate from clients in the upcoming year:  

 

Per Acosta:

 

On the business side, the most difficult question is always how officers and directors navigate when their companies are in the zone of insolvency. This question is often difficult, because there is not a bright line test that tells a company when it has crossed into the vicinity of insolvency.  

 

The second most difficult question is generally how a company can achieve a deferment, forbearance or workout, and keep their business out of bankruptcy. Demonstrating to creditors and lenders that they can obtain a higher recovery outside of bankruptcy is a good start. Formulating alternative solutions for higher recoveries outside of bankruptcy is also generally key for creditors. On the client side, assisting them to rightsize and develop realistic forecasts for 2021 is very important. But, an adviser must also keep in mind that chapter 11 bankruptcy can often be a helpful tool to reorganize a balance sheet, sell assets or dispose of unprofitable operations. Thus, chapter 11 should never be automatically ruled out as one of many options. 

 

On the consumer bankruptcy side, the most difficult questions would include how long the client has before a creditor takes away his or her house, car or other property and what property can that client learn to live without. 

 

During tough times, everyone (companies and consumers alike) have to make adjustments. 

Texas Patent Filings

The U.S. Supreme Court's 2017 decision in TC Heartland LLC v. Kraft Foods Group Brands LLC restricted venue requirements for patent infringement litigation, ultimately impacting filings in the Eastern District of Texas, the district of choice for most patent owners prior to the decision.

 

In essence, the ruling removed the general provision that an action could be initiated against a corporate defendant residing in any judicial district subject to the court's personal jurisdiction. Under that provision, the presence of the defendant's products or services in a district was enough to establish residence.

 

Eliminating this option left the more restrictive provisions of the patent venue statute (28 U.S.C. sec. 1400). That statute provides that any "civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business." 

 

Supreme Court interpretation of residence under this statute has meant the state of incorporation, leaving the broader provision of a "regular and established place of business" for plaintiffs to select their forum.

 

Early speculation of this change led many to believe that patent filings would shift to Delaware, which, at that time, was dealing with a judicial shortage or California courts, generally perceived as more defense-friendly.  See ‘TC Heartland’ Ruling and its Impact.

 

While patent filings have increased in California and Delaware Courts, many filings have shifted from the Eastern District of Texas to the Western District. This district is home to many technology companies establishing "a regular and established business place" under the statute, quickly making it the venue of choice for high-tech patent infringement actions.

 

Note: The following data was obtained from the Unified Patents Portal. 2020 data is current  through 11/13/2020

Patent Filings – Five Most Active Courts since 2015

 

Five district courts have accounted for 58% - 63% of all patent filings (opened and closed) since 2015.

 

- The Texas Eastern District has accounted for 10% of all patent filings in 2020, down from 44% in 2015.

- The Western District has 22% of all filings in 2020, compared to 8% in 2015.

- The California Northern, Eastern, and Delaware Districts went from 18% total filings in 2015 to 31% in 2020.

- Total filings in the Texas Western District are up 180% thus far in 2020, while filings have slipped 70% in the California and Delaware Districts. The change in filings suggests that traditional Texas Eastern District Court filings are beginning to migrate across Texas and shifting away from the initial surge experienced in the California and Delaware Districts immediately following the 2017 TC Heartland decision.

 

The five most active district courts have accounted for 65% of all new openings in 2020, up from 31% in 2015.

- The overall percentage of new openings in the Texas Eastern District has dropped from 20% in 2017 to 11% in 2020.

- Conversely, the overall percentage for openings in the Texas Western District has gone from 2% to 22%.

Patent Filings – The Ten Most Active Defendants

 

With plaintiffs leveraging the “regular and established place of business” requirement of the patent venue statute, the Texas Western District is becoming the venue of choice for new patent filings. The increase in filings is attributable to the significant presence of high-technology companies in Austin and San Antonio, which sit within the District.

 

Between 1/1/2020 to 11/13/2020, ten defendants (Apple, Dell, EMC, Google, Hewlett Packard, Huawei, Microsoft, Samsung, TP-Link, and  ZTE) accounted for a quarter of all 764 patent litigation filings in the Western District.

- Additionally, these defendants made up 12% of all filings across the five most active district courts and 8% across all districts.

 

In 2017, of all the new patent filings against these defendants, 50% were in the Eastern District of Texas, 25% were in California and Delaware Districts, and there were no filings in the Western District.

 

- In 2019, new filings for these defendants started shifting to the Western District, which accounted for 21% across all Districts.  In 2020, 67% of all new patent filings against these defendants have been in the Western District of Texas.

- The percentage of all high-tech patent filings in the Western District has grown from 62% in 2017 to 90% in 2020.

To dig deeper into the data behind Texas' legal market, visit Legal Compass, a comprehensive research and analysis tool by ALM Intelligence.