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The Importance of Trade Secret Audits

 
by John Marsh 17. May 2011 15:30

Read almost any article or post about protecting trade secrets in a large organization and it will emphasize the importance of securing written agreements, having thorough policies on confidentiality and ownership, limiting access to sensitive information through passwords, encryption and other means, and numerous other safeguards to secure a company's trade secrets. However, one important element that is sometimes mentioned but rarely emphasized for the protection of trade secrets for a large company is the need for annual or, better yet, semi-annual audits of those agreements and policies.
 
A trade secret audit is nothing more than thoroughly double-checking your files in an organized fashion to make sure that your paperwork, agreements and policies are in order. Audits are important in three respects for a large company. First, they ensure that management, legal and human resources administrators detect any problems with agreements that may have slipped through the cracks. There are too many cases that have arisen in which a company has failed to get a signed agreement, or found an agreement that is with an affiliate or subsidiary rather than the parent company as the actual employer, or uncovered some other deficiency or enforceability issue that leads to added cost, unnecessary defenses or, in the worst case, the inability to enforce the agreement. For example, a recent case in New York, IBM v. Johnson, 629 F. Supp. 2d 321 (S.D.N.Y. 2009), reinforces the importance of following through and ensuring that agreements are signed appropriately by an employee. In that case, the failure to get an executive to sign the non-compete on the correct line (he deliberately signed on the wrong signature line to avoid committing to the non-compete) led to the district court's refusal to enforce that agreement. Likewise, if a vendor, supplier or contractor has not returned a signed copy of a non-disclosure agreement, the audit should identify that mistake. In short, an audit allows a large organization to preempt or reduce problems.
 
Secondly, the process of auditing not only leads to the detection or preemption of problems or mistakes in a large company but it should lead to improved internal procedures or methods for securing sensitive information and better coordination between departments. In the best cases, it leads to a new dialogue internally between a company's departments or divisions, or with outside counsel, about additional measures that can be done to streamline or better those processes. It may lead to new procedures in "exit interviews" to ensure that all confidential information is retrieved at the close of the relationship. It may cause the client to forward its agreement to their outside counsel to see if it can be improved or upgraded. It may lead to policies or procedures to better monitor "troubled" employees who most frequently turn up in trade secret disputes. As David Almeling's groundbreaking article has noted, 93% of all trade secret disputes arise out of relationships in which the parties know one another. Audits enable you to identify and minimize the peril that arise out of those relationships. 
 
Finally, should litigation ultimately result, audits enable a client to "build a case" about the reasonableness of the safeguards that it has undertaken. Courts have taken an increasingly tougher and skeptical view of trade secret claims and a challenge to the reasonableness of the plaintiff's safeguards remains the easiest and cleanest mode of attack.  In CMBB LLC v. Lockwood Manufacturing, 628 F. Supp.2d 881 (N.D. Ill. 2009), the district court dismissed a trade secrets case because of what it perceived to be the company's lackadaisical approach to managing its trade secrets -- i.e., no written agreements, policies that failed to safeguard information, failure to retrieve laptops or confidential upon termination, etc.  In contrast, an audit shows that the client is proactive and vigilant and better enables that client to defect any criticisms of the actions or safeguards that it has taken. 
 
Sun Tzu cautioned, "if you are ignorant both of your enemy and yourself, you are certain to be in peril."  If you are part of a large company with multiple departments or divisions, audits allow you to better understand your organization and identify your problem employees and partners, and therefore reduce and hopefully eliminate that peril.
 

WikiLeaks and Trade Secrets: The First Amendment Challenge

 
by John Marsh 13. May 2011 16:30

Does the First Amendment provide complete protection to a whistleblower like WikiLeaks that attempts to post trade secrets on the Internet?  That may be the key question in any whistleblower trade secrets case.
 
Following up on my recent post on the Julius Baer v. WikiLeaks case, and my presentation at the AIPLA's Spring Meeting later today, one of the issues -- if not the issue -- that presented the greatest concern to the district court in that case was that its order might qualify as a "prior restraint" in violation of the First Amendment.  
 
Federal courts are very attuned to constitutional issues, and, I would respectfully submit, especially amenable to a claim that their order might present a prior restraint in violation of the First Amendment. See Procter & Gamble Co. v. Bankers Trust Co., 78 F.3d 219, 225 (6th Cir. 1996); Ford Motor Co. v. Lane, 67 F. Supp. 2d 745 (E.D. Mich. 1999).  State courts, on the other hand, may be more sensitive to the policies underlying trade secret law, as decisions by the California Supreme Court and the Ohio Supreme Court have shown.  In those cases, those courts have rejected broad prior restraint arguments and recognized that policies underlying the protection of trade secrets must be balanced as well.  American Motors Corp. v. Huffstutler, 61 Ohio St. 3d 343, 575 N.E.2d 116 (Ohio 1991);  DVD Copy Control Assoc., Inc. v. Bunner, 31 Cal. 4 864, 4 Cal. Rptr. 3d 69 (2003).
 
In the Julius Baer case (see my earlier post), the intervention of the media and the arguments that they presented in that case influenced the court's decision to dissolve the injunction.  While they properly noted that some First Amendment protections that would be implicated (i.e., the impact that a shutdown of WikiLeaks website would have on news-gathering efforts), their arguments of course overlooked the important governmental and private interests in protecting confidential information (in that case, the privacy rights of the bank's clients).
 
It is important to remember that the First Amendment issues -- and there were plenty -- were briefed extensively over an incredibly short period of time and on issues that were the "bread and butter" of the intervening media and public interest parties.  This ultimately provided them with what proved to be an overwhelming procedural advantage.  
 
In Julius Baer, the California First Amendment Coalition (“CFAC”), a non-profit public interest organization composed of large daily newspapers in California, and the ACLU both sought to intervene on February 26, 2008.  On that day, both submitted extensive briefs not only extolling the importance of WikiLeaks to its members’ news-gathering efforts, but vigorously arguing that the First Amendment protects the right to gather and receive information and that the injunction in question had prevented the public’s access to the information previously contained on that website.  The CFAC then filed yet another brief, challenging the jurisdictional basis of the case and arguing that diversity of jurisdiction was lacking because Julius Baer and WikiLeaks were both foreign citizens.  Three days after the appearance of the CFAC and the ACLU (February 29, 2008), the district court issued its order dissolving the injunction, based on those arguments.
 
The reality is that many trade secret and commercial litigators may not be conversant in the wide-ranging law concerning the First Amendment.  Given the speed of an injunctive proceeding, and the fact that counsel for the plaintiff is expected to be prepared to respond to whatever obstacle is thrown in his/her path, the intervention by the media in this kind of case can be devastating. 
 
Arguing that the requested injunction is "content neutral" is probably the best argument that can be made in these circumstances because it triggers lesser scrutiny from the court.  It is worth noting that this argument appears to not have been made in Julius Baer, either because of the lightning speed of the briefing on this issue or because the substantive basis for the injunction was rooted in constitutional and statutory privacy interests (as opposed to trade secrets).  The DVD Copy Control case, cited above, provides a superb template for understanding and ultimately making this argument; in that opinion, the California Supreme Court very methodically reasoned that a narrow trade secret injunction would qualify as a content neutral injunction.  The California Supreme Court further held that such an injunction was supported by a number of equally important policy considerations -- preserving incentives to innovate, protecting investment in research and development, and the promotion of commercial and business ethics, among others.
 
In short, if you are faced with a sophisticated whistleblower with access to the Internet, First Amendment issues will be front and center in any litigation that tries to restrain him.  Allaying a court's concerns that you are protecting an important private property right, and not seeking to muzzle an important issue of public safety or concern, will be critical.
 

Let's Meet at the AIPLA Spring Meeting in San Francisco

 
by John Marsh 12. May 2011 01:00

For those of you who are attending the American Intellectual Property Law Association's Spring Meeting in San Francisco this week from May 12 through May 15, I wanted to let you know that I'll be co-chairing a panel discussion with Janet Craycroft, Intel Corporation's Director for Legal Counseling and Legal & Corporate Affairs, and Malcolm Harkin, Intel Corporation's Chief Information Security Officer, entitled “Re-Thinking Protection of Corporate Secrets in the Wikileaks Era.
 
The presentation is from 3:30 to 5:30 p.m. on Friday, May 13, in the Rose Ballroom, Lobby Level of the San Francisco Palace Hotel. My portion, Current Legal Landscape: Litigation Strategies for Victims of Wikileaks or Self-Styled Whistleblowers,” will focus on the volatile litigation issues arising from the WikiLeaks threat. Malcolm's presentation, “Wikileaks Basics:  Technology, Ideology and What is Known About How Leakers Provide Material," will focus on the technical aspects of confronting the WikiLeaks phenonmena. Finally, Janet's presentation, “Advising the Corporate Client About Wikileaks:  Emerging Best Practices to Prevent Data Leaks,” will focus on best practices for detecting and avoiding data breaches and trade secret theft.
 
I hope to see many of you at what should be a dynamite presentation. But either way, don't hesitate to email or tweet me (@TSLitigator) if you would like to compare notes, swap stories or grab a cup of coffee.
 

WikiLeaks and Trade Secrets: The Perfect Storm

 
by John Marsh 10. May 2011 07:45

The WikiLeaks scandal has generated widespread concern about how to manage a crisis where a disgruntled employee seeks to post confidential information or trade secrets on the Internet. This scandal arose when PFC Bradley Manning allegedly stole hundreds of thousands of classified diplomatic files and documents and delivered them to the Internet organization, WikiLeaks. WikiLeaks holds itself out as a tool for helping individuals “safely get out the truth” about government and other institutions, and it posted those classified documents on its website for the world to see.

WikiLeaks has not confined its efforts to government information and has also posted confidential information taken from large banks and other private companies that it deemed newsworthy. For example, WikiLeaks has published internal information from Bank of America documenting its internal dialogue on confronting the unique threats posed by WikiLeaks. 

An unsuccessful attempt by the Swiss bank, Julius Baer, to restrain WikiLeaks from posting information on its website in 2008 has now received renewed attention because of the recent scandal [See Bank Julius Baer & Co. Ltd., et al. v. WikiLeaks, et al., Case No. 3:08-cv-0824-JSW, U.S.D.C., N.D. Calif]. Side Note: For those who are interested, I will be speaking on this issue at the American Intellectual Property Law Association's Spring Meeting on Friday, May 13, 2011

The Julius Baer case is worth re-examining in several respects because of the renewed interest in the harm that WikiLeaks or a similar self-styled whistleblower can cause by attempting to post information on the Internet. According to Julius Baer's complaint, a disgruntled former employee, Rudolf Elmer, took client records and data in violation of a confidentiality agreement he signed with Julius Baer. After Elmer’s termination, Julius Baer discovered that Elmer had begun posting hundreds of those records on WikiLeaks’ website. The district court was initially receptive to Julius Baer’s claims and granted Julius Baer’s request for a TRO, enjoining WikiLeaks from further posting or displaying that information and directing WikiLeaks to remove all copies or images from the websites under its control. 

While Julius Baer did not join Elmer as a defendant, it did join the WikiLeaks domain administrator, Dynadot, LLC,  to ensure that the party responsible for the WikiLeaks’ domain name and/or website would comply with any potential order. Julius Baer and Dynadot reached a stipulated permanent injunction order that Dynadot would, among other things, immediately “lock the wikileaks.org domain name to prevent transfer of the domain name" and "disable the wikileaks.org domain name and account to prevent access to and any changes from being made to the domain name and account information.” 

In the meantime, the district court’s entry of the TRO did not prevent WikiLeaks’ posting of the customer information. While it appears Julius Baer was successful in locking down and disabling the WikiLeaks’ domain name registered through Dynadot, the order did not prevent the posting of that customer information on other “mirror” websites.    

In addition, media and public interest groups immediately moved to intervene in the case, arguing that the stipulated permanent injunction improperly interfered with their news-gathering efforts and amounted to a violation of the First Amendment. The district court, in the face of these concerns and the frustration of the order due to the mirror websites, subsequently dissolved that permanent injunction.

The trade secret implications of this case could fill a law review article and warrant further posts on the First Amendment issues, the use of "mirror" websites, among other important points. However, an increasingly common issue is to what degree a trade secret loses protection if it is posted on a website. 

Milgrim, the key commentator in trade secret law, has noted that at least one court has “cautioned under the basic principles of equity, recognized in the trade secret context, a wrongdoer cannot rely on his own postings to avoid the imposition of an injunction by arguing the works posted have lost their secrecy” [4 Milgrim on Trade Secrets, §17.03 at 17-12 (citing Religious Tech. Ctr. V. Netcom On-Line Commun. Servs., 923 F. Supp. 1231, 1256 (N.D. Cal. 1995), trade secret holding revised (N.D. Cal. Jan. 6, 1997)].  Another court has found that the information is now effectively in the “public domain” and refused to issue an injunction [See American Hearing Aid Assocs., Inc. v. GN ReSound N. Am., 309 F. Supp. 2d 694, 705-706 (E.D. Pa. 2004) (conversion claim rejected because customer lists posted on plaintiff’s website could not qualify as trade secrets)]. 

The law is far from settled and the facts of each case may prove critical. As Milgrim notes, publication on the Internet may not necessarily terminate trade secret status, as the facts and circumstances surrounding each disclosure may differ; for example, if prompt and effective action resulted in the postings being taken down, it can be argued that any disclosure was fleeting in nature and did not become known to the relevant audience, i.e., competitors [4 Milgrim, §17.03 at 17-16]. In addition, to the extent that the wrongdoer participated in the posting, he or she should be equitably estopped from making that argument [Id.; see also id, §15.01[1][a][ii] and authorities cited therein; see Silicon Image, Inc. v. Analogix Semiconductor, Inc., 2007 U.S. Dist. LEXIS 96073 at ** 44-46 (N.D. Calif., Dec. 20, 2007) (finding that source code published on Internet did not destroy the secrecy of information at issue)]. However, in the case of third parties (such as media who intervene and rely upon or cite to the postings), that equitable basis may not apply. Finally, it should be noted that the factual circumstances may vary from case to case and the kind of remedy sought in the case (injunction or damages) may further shape the impact of a defense rooted in this issue. 

In short, the answer is “it depends" on many facts, including the length of time that the information was posted on the Internet, when it was posted, and who may have viewed it while it was there. As a result, if a company moves promptly to take the information down, it should be in a strong position to protect any trade secrets that were improperly posted.

 

Social Media and Trade Secrets, Part I

 
by John Marsh 4. May 2011 21:18

The phenomena of social media and its near exponential growth has generated tremendous dialogue within the IP community about its impact. Facebook now has more than 640 million members, Twitter now has over 175 million users, and LinkedIn has more than 101 million users. Given these staggering numbers, and the inevitability that some users will eventually misuse or attempt to display confidential information or trade secrets of their employers, it makes sense to review the recent cases addressing trade secrets, as well as the steps a client can take to minimize that risk.

One of the first noteworthy cases comes from the Eastern District of New York and it illustrates the challenges that an employer may face when trying to protect a customer list in this new era.  In Sasqua Group, Inc. v. Courtney, 2010 U.S. Dist. LEXIS 93442 (E.D.N.Y. Aug. 2, 2010), affirmed, Sept. 7, 2010, the plaintiff, Sasqua, was a recruiting and search firm that built its niche in the area of executives for the financial services industry.  According to Sasqua, its founder, Christopher Tors, had worked for over 20 years as a precious metals and foreign currency trader for Goldman Sachs, AIG and UBS, and had used that experience to form Sasqua and compile a substantial client database. That client database included, among other things, client contact information, individual profiles, contact hiring preferences, employment backgrounds, descriptions of previous interactions with clients, and resumes. Tors claimed that he hired and trained his niece, Lori Courtney, as a recruiter for Sasqua. After Courtney left Sasqua to form a competing firm, Sasqua and Tors concluded that Courtney was using the contents of their client database, which they believed contained highly confidential information. 

Because Sasqua did not have a written non-competition or non-solicitation agreement with Courtney, they commenced an injunctive action for misappropriation of trade secrets. However, in a withering opinion rejecting that effort, the U.S. District Court Magistrate who presided over the injunction proceeding found that their customer database and the information contained within that database were not trade secrets. 

In particular, the Magistrate found it significant that Courtney was able to demonstrate in court how the information in Sasqua's database could be found through internet searches of websites such as FX Week, Google, Bloomberg.com, and LinkedIn. The Magistrate was impressed with Courtney’s testimony about “how such a search could be conducted on Linkedin, which [Courtney] described as being 'like Facebook but for business' and as being more searchable than Bloomberg 'because people put their whole profile on LinkedIn.'" (Sasqua Group, at p. 24). 

The Magistrate was not troubled by the fact that Courtney admitted she did not use the internet to get the information at issue and all but conceded that she had taken it from Sasqua. In holding that the information was not confidential information or a trade secret, the Magistrate noted how the internet had changed the business landscape:
 
"The information in Sasqua's database concerning the needs of its clients, their preferences, hiring practices, and business strategies, as well as Sasqua’s acquaintance with those decision-makers may well have been a protectable trade secret in the early years of Sasqua's existence when greater time, energy and resources may have been necessary to acquire the level of detailed information to build and retain the business relationships at issue here. However, for good or bad, the exponential proliferation of information made available through full-blown use of the Internet and the powerful tools it provides to access such information in 2010 is a very different story" (Sasqua Group, at p. 39). 

Three lessons can be drawn from the Sasqua Group decision. First, it is critical to have written non-competition, non-solicitation or confidentiality agreements with employees, contractors and vendors with whom confidential customer information may be shared.  Second, an employer needs to have agreements and policies that make clear that sensitive customer information gathered while an employee is the property of the employer and is to be protected. Such an acknowledgement would have necessarily bolstered Sasqua’s claim of proprietary information at the TRO and preliminary injunction stage. Third, an employer has to ensure that its confidential customer information does not find its way into social media websites. This means that that the employer must monitor its employees’ social media profiles, descriptions and blogs to ensure that they are complying with the employer’s policies and agreements.

 

Arbitration and Trade Secrets: Avoiding the Trap

 
by John Marsh 4. May 2011 15:44

Agreements requiring the arbitration of disputes are generally perceived as being "pro-business," but do they really help companies in trade secret disputes? The United States Supreme Court's recent holding in Rent-A-Center West, Inc. v. Jackson, a decision enforcing an arbitration provision in a consumer contract, has rekindled the debate about the pros and cons of arbitration, as well as its compatibility with trade secret disputes. 
 
While arbitration may make sense for some disputes, it is a forum that is ill-suited for a business seeking to immediately protect its trade secrets.  The main reason is speed.  Trade secret cases, by their nature, require rapid action, generally in the form of a motion for a temporary restraining order to prevent any improper use or disclosure of the trade secrets in question.  If you or your client have trade secrets at risk, this means you need to be able to move quickly or they will be gone, used, disclosed or posted on the Internet. This means that once you have put together your pleadings and supporting documents, you need to be able find a decision-maker who can promptly here your request and enter an appropriate order to stop the bleeding.  State and federal courts are ideal for this kind of relief, and it is the rare case where you do not have a conference or hearing scheduled for your TRO within 24 to 48 hours of filing your request.
 
Arbitration, on the other hand, by its nature does not lend itself to these types of nimble emergency proceedings. Arbitration moves slowly, very slowly.  Arbitration is rooted in agreement and consent, and that agreement and consent is required at various critical junctures in the arbitration process.  If one of the parties to an arbitration wants to slow things down (because he doesn't want to be stopped or wants to cover his tracks), it is significantly easier to frustrate the arbitration process by delay in making decisions or not agreeing at all. While some arbitration associations may provide for the appointment of an interim or emergency arbitrator, that process can still take many days if not weeks. Likewise, as there are no formal rules regarding expedited discovery, the ability to conduct discovery can be slowed -- if not completely frustrated -- by an obstinate defendant who renegs or refuses to agree to any expedited discovery.  If you have secured your TRO in a court and then moved to an arbitration proceeding, there may be a period where you are effectively in limbo, as the court is now reluctant to do anything affirmative because an arbitrator is in the process of being selected; this uncertainty can again present opportunity for mischief, as well as resistance to discovery. Finally, an arbitrator cannot enforce his or her order, which means disputes over compliance and enforcement may end up back in the nearest court and lead to a potential "back and forth" between the arbitrator and court as to what was ordered and what can be enforced.  All of these lead to greater expense, especially when you throw in the hourly fees of the arbitrator.   
 
Given the potential for delay, mischief and added expense, companies -- especially small companies -- should avoid clauses that seek to use arbitration for the resolution of intellectual property, trade secret or injunctive relief disputes. If your client feels strongly about keeping an arbitration provision for the resolution of other issues or potential damages claims, you should insist, at minimum, that injunctive relief proceedings regarding IP rights or trade secrets be specifically carved out from the arbitration process.  If you don't take these steps, you are exposing your client to a potentially frustrating, expensive and ultimately unsuccessful experience.
 

Welcome to The Trade Secret Litigator

 
by John Marsh 30. April 2011 15:26

Welcome to The Trade Secret Litigator.

Last year, a lawyer attending a seminar that I was presenting asked me what websites she could follow to stay current on developments in the area of trade secrets and non-compete law. It occurred to me that while there has been a tremendous growth in the number of blogs by lawyers, there had not been a corresponding growth in the number of blogs dedicated to the commercial, practical and legal issues arising out of trade secret law and the law of non-competes. That is not to say there are not excellent blogs that are out there that cover trade secrets issues, but I believe that this area remains under-represented, particularly given the dramatic growth of trade secret law.

About 10 years ago, my practice began to increasingly consist of TROs, injunctions, and other forms of emergency litigation. As I did more of this work, trade secret and covenant not to compete cases came to dominate my practice. Since the beginning of the economic downturn in late 2007, I sensed that companies were filing more trade secret cases and that coverage of them by the mainstream media such as The Wall Street Journal, Forbes and others had increased significantly. The infamous Mattel/Bratz dispute, the Starwood/Hilton case, the EMC/Donatelli dispute and the Hewlett Packard/Hurd case have all received significant media attention and have reinforced that there is indeed something going on here.

David Almeling's two outstanding empirical analyses on the growth of trade secrets litigation published in 2009 and 2010 in the Gonzaga Law Journal clinched it for me. For anyone seriously practicing law in this space, these two articles are required reading.  The growth in my practice and the increasing interest and growth in this area of the law were confirmed by these groundbreaking articles by David and his colleagues. 

This growth has coinceded with certain economic realities. First, a brutal economy has served to further fray the relationship between employer and employee.  Desperate people do desperate things.  As 93% of the disputes analyzed by one of the Almeling article arose out of relationships where the parties knew each other, the deterioration of this relationship presents kindling for trade secret disputes.  Second, the increasing mobility of employees has created more flashpoints for disputes over non-competes and similar agreements.  Third, the ongoing developments in mobile device technology that allow for the compressing and movement of tremendous amounts of information present greater opportunities for unscrupulous actor.  Finally, as companies scale back and attempt to be more efficient in their intellectual property budgets, many are reacquainting themselves with the benefits of using trade secret law, rather than its more expensive relation, patent law, to protect their intellectual property (more to follow on this possible trend).  For these and other reasons, I believe that this area of the law is experiencing a true renaissance.

So why I am writing this blog? The simple answer is I enjoy what I do and I enjoy sharing my experiences with others. Of course, I also hope this blog becomes a resource for and kindles a dialogue among others truly interested in this area of the law. As a result, in addition to posts about recent and noteworthy legal decisions, this blog will also speak to practical litigation issues that frequently accompany trade secret litigation, consider larger societal and technological trends that affect this area, and, finally and perhaps most importantly, speak to administrative and human resources issues that also arise in this context and that need to be considered to protect trade secrets.

Having been on both sides of the aisle, representing plaintiffs as well as defendants, I will attempt to cover both sides of the debate on issues as they arise in this area; however, I'll admit in advance that since my bias is toward the side of the plaintiff, my posts will likely ultimately reflect that perspective. 

Again, welcome aboard!

 

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Trade Secrets

About John Marsh

John Marsh Hahn Law AttorneyI’m a Columbus, Ohio-based attorney with a national legal practice in trade secret, non-compete, and emergency litigation. Thanks for visiting my blog. I invite you to join in the conversations here by leaving a comment or sending me an email at jmarsh@hahnlaw.com.

Disclaimer

The information in this blog is designed to make you aware of issues you might not have previously considered, but it should not be construed as legal advice, nor solely relied upon in making legal decisions. Statements made on this blog are solely those of the author and do not necessarily reflect the views of Hahn Loeser & Parks LLP. This blog material may be considered attorney advertising under certain rules of professional attorney conduct. Regardless, the hiring of a lawyer is an important decision that should not be based solely upon advertisements.

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