NOVEMBER 2023
VOLUME 20/NUMBER 8
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ATTORNEY FOEISEEDSTO GROW IN P
PATENT N O I T A G I LIT
The evolution of high-earner compensation Is your global contractor really an employee? Child privacy risk poses new challenges for legal teams
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contents
NOVEMBER 2023 Volume 20/Number 8
LITIGATION
4 Editor’s Desk DATA PRIVACY & CYBERSECURITY
8 Child Privacy Risk Poses New Challenges for GCs As Stricter Child Online Protections Take Effect Corporate must understand and comply with an evolving ecosystem of regulations protecting the privacy rights of children and their data. By Ajith Samuel LABOR & EMPLOYMENT
14 Exceptional Cases Under § 285 Could Generate Higher Attorney Fees in Patent Litigation Once a district court determines that a case is exceptional, the prevailing party is entitled to reasonable attorney’s fees. By Lionel Lavenue and Joseph Myles LEGAL OPERATIONS
16 How to Drive Efficiencies and Savings in Critical Legal Vendor Relationships
12 Companies Must Revisit HighEarner Compensation After the Supreme Court’s Ruling in Helix Energy
Stated simply, value is focused on how the company gets the highest quality legal services for the lowest possible cost.
Companies must adjust their day rate payments to comply with the Court’s opinion, or pivot to an hourly wage with overtime.
FEATURE
By Margaret H. Allen and Tayler G. Bragg
By Joe Polizzotto
18 Global Hiring: Is Your Contractor Really an Employee? It’s crucial to evaluate each contractor role to ensure you aren't unknowingly putting your company at risk. By Miranda Zolot
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EDITOR’S DESK
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n this issue of Today’s General Counsel, Margaret H. Allen and Tayler G. Bragg analyze the U.S. Supreme Court’s ruling on companies that pay high-earning workers a day rate without overtime. The Court
knew that the only two options left after its decision required compensation for days not actually worked, but according to the authors, it was not sympathetic to employers who find themselves in that dilemma. Ajith Samuel argues that new federal legislation imposing child privacy regulations on most enterprises, even those that don’t interface with children, is inevitable. Despite the fact the legislation has bipartisan support, it’s stalled along with everything else of consequence as the second session of the 117th Congress attempts to organize itself to pass bills. Read Samuel’s article for practical advice about how to stay compliant when The Kids Online Safety Act (KOSA), COPPA 2.0, and The American Data and Privacy and Protection Act (ADPPA) eventually become law. Maybe next year. In other articles, Joe Polizzotto discusses best practices in value-based vendor selection; Lionel Lavenue and Joseph Myles examine the issue of reasonable fees for patent litigation when a high fee is part of the strategy that defendants employ against patent-asserting entities; Miranda Zolot provides a comprehensive checklist for defensible classification of global workers as either employees or contractors.
Bob Nienhouse, Editor-In-Chief bnienhouse@TodaysGC.com
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DATA PRIVACY & CYBERSECURIT Y
Child Privacy Risk Poses New Challenges for GCs As Stricter Online Protections Take Effect By AJITH SAMUEL
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t’s a scary time to be a parent. In today’s digital world, it’s hard to know where kids are spending their time online and what to protect them from. It’s also a precarious time for corporate legal departments, which are now required to understand and comply with an evolving ecosystem of regulations protecting the privacy rights of children and their data.
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To date, the Children’s Online Privacy Protection Act (COPPA), a federal law that regulates the online collection of personal information from children under the age of 13, has not posed a serious threat to most companies (except for publishers and enterprises with web properties or mobile apps specifically made for children under 13). But now, two imminent structural
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changes are coming to COPPA, changes that will push all corporate counsel at all enterprises to revisit child privacy risk to remain compliant. After all, non-compliance with COPPA can result in hefty fines levied by the Federal Trade Commission (FTC), reputational damage, and potentially costly litigation. In June alone, the FTC, in conjunction with the Department of BACK TO CONTENTS
Justice, filed proposed orders against Microsoft, Amazon, and others alleging COPPA violations. In its current form, COPPA has language that makes exceptions for certain sites, like those that are not “directed at” children or don’t require “actual knowledge” that children under 13 are using the site. However, these exceptions are unlikely to
With the updates to COPPA, it’s not so much about what happens after consent has been gathered (from a minor, or a guardian if the child is under 13), assuming the enterprise is following generally accepted data practices. The choke point for child privacy will be determining the user’s age, then gathering the appropriate consent if underage for the privacy
Corporate counsel at all enterprises will have to revisit child privacy risk to remain compliant. survive if congressional efforts to tighten COPPA, such as The Kids Online Safety Act (KOSA), COPPA 2.0, and The American Data and Privacy and Protection Act (ADPPA) ultimately succeed. Consequently, enterprises will need to closely study the users of their sites and apps, and potentially add age gating. Impending updates to COPPA also seek to raise the age of consent, from 13 to as high as 17, to protect a broader range of children — a structural change which will have an even bigger impact on corporations and legal departments. As a result, many high-traffic websites, apps, and games with many users aged 13 and older will need a major timely and costly operational overhaul to stay COPPA compliant. Burgeoning state regulations typically include similar restrictions on child privacy, with varying ages of consent. For example, Utah recently signed a bill that prohibits children under 18 from using social media apps such as Tik Tok without parental consent.
DATA CHALLENGES OF STRICTER REGULATION For legal departments, stricter regulations bring new data challenges.
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regulation covering the interaction. To tackle this challenge, general counsel will need to choose a jurisdictional strategy — either applying state regulations where the user is located or adhering to regulations in the corporation’s operating state. Since children grow up, enterprises should also track a user’s age and treat them accordingly as they pass through the age of consent for the chosen jurisdiction. To prepare for a future with stricter COPPA regulations and trickier privacy compliance management, enterprises should also do the following: • Audit their digital channels to identify where data is being gathered (website, mobile app, text message, email, etc.) and reduce data ingestion (sign-ups, marketing, tracking) wherever possible to reduce risk. • Implement flexible consent management systems that can handle age gating, parental notices, and other relevant forms of consent. • Foster collaborative relationships between legal/compliance, marketing, and IT to ensure the company is equipped to stay agile and tackle challenges as privacy
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laws evolve. Operational privacy compliance is complex and rarely works when it’s just a mandate from legal. Through all these changes, enterprises and corporate counsel can’t forget about the most important implicated stakeholder: the user. While some companies deliberately make their privacy policies convoluted and hard to read as a defense tactic, privacy regulators (including the authors of COPPA) have encouraged the use of much more user-friendly privacy notices that cover key concerns without requiring technical legal background, like a nutritional label. User-consent experiences that leverage these trust-building features will gain much higher consent uptake and create happier customers.
Ajith Samuel, Exterro’s Chief Product Officer and cofounder of the company, leads the company’s product strategy team. Samuel has 15 years of experience in regulatory compliance and designing and architecting largescale information systems for the futures industry.
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LABOR & EMPLOYMENT
Companies Must Revisit High-Earner Compensation After the Supreme Court’s Ruling in Helix Energy By MARGARET H. ALLEN AND TAYLER G. BRAGG
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ompanies that pay highearning workers a day rate without overtime must exercise caution following the Supreme Court’s February decision in Helix Energy. The Court held that when a highearning employee’s paycheck is based
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solely on a day rate (so that the individual receives a certain amount if the person works one day in a week, twice as much for two days, and so on), the employee is not paid on a “salary basis,” as that term is used in the Fair Labor Standards Act (FLSA), and is entitled to overtime pay.
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The case at issue involved a set of facts familiar to the oil and gas industry. A “toolpusher” who supervised 12 to 14 workers, and who earned over $200,000, sued to recover overtime. The company argued that he was exempt. The dispute turned on whether the worker BACK TO CONTENTS
was paid a salary. The Court held, in a 6-3 decision, that “such an employee is not paid on a salary basis, and thus is entitled to overtime pay.” To reach this holding, the Court analyzed two regulations. The first regulation, § 602(a), requires a salary to be “paid on a weekly, or less frequent basis.” Thus, the Court ruled that § 602(a) “applies solely to employees paid by the week (or longer)” and “is not met when an employer pays an employee by the day.” The second regulation, § 604(b), provides that “earnings may be computed on an hourly, a daily or a shift basis,” if (1) “the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of
worker would receive an amount each week bearing a reasonable relationship to the “weekly amount he usually earned.” Companies have two options in the wake of Helix: Either adjust their day rate payments to comply with the Court’s opinion, or pivot to an hourly wage with overtime. Option 1 Pay a “day rate” and comply with Helix. The Court suggested that companies could pay a day rate and comply in two ways. Companies may add to the day rate a “weekly guarantee” that is paid regardless of the number of days actually worked and is roughly equivalent to the employee’s usual earnings for a normal workweek. Or companies may convert the day rate to a straight weekly
their payment practices and business goals to evaluate how to compensate high-earning workers who were formerly paid a traditional day rate.
Margaret H. Allen is a partner at Sidley who litigates high-stakes employment and commercial matters. margaret.allen@ sidley.com Tayler G. Bragg is a managing associate at Sidley, focusing her practice on complex disputes and investigations for companies and individuals. tbragg@sidley.com
Companies have two options in the wake of Helix: Either adjust their day rate payments to comply with the Court’s opinion, or pivot to an hourly wage with overtime. hours, days or shifts worked,” and (2) a reasonable relationship exists “between the guaranteed amount and the amount actually earned.” That reasonable relationship “will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings . . . for the employee’s normal scheduled workweek.” The Court explained that the two conditions of § 604(b) “create a compensation system functioning much like a true salary — a steady stream of pay, which the employer cannot much vary and the employee may thus rely on week after week.” The Court ruled that the day rate did not satisfy § 604(b), because the company did not guarantee that the BACK TO CONTENTS
salary. Under either option, companies may potentially pay workers for days that they do not actually work. Option 2 Pivot to an hourly wage. For companies that want to pay workers for days actually worked, an hourly wage with overtime might be an attractive option. But an hourly wage with overtime is not risk free, since companies could face overtime actions. The Court recognized that either option would require compensation for days not actually worked and would thus increase costs for businesses. But the Court was not sympathetic. For those reasons, companies should carefully consider NOVEMBER 2023
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LITIGATION
Exceptional Cases Under § 285 Could Generate Higher Attorney Fees in Patent Litigation By LIONEL LAVENUE AND JOSEPH MYLES is entitled to reasonable attorney’s fees. Courts use the “lodestar” method to calculate a reasonable attorney’s fees award, by multiplying the number of hours reasonably spent on the litigation by a reasonable hourly rate. Both can diverge from counsel’s actual billing and requested fees, leading to a reduction in the total fee award. Avoiding reductions better compensates the client and raises the risk to the opposing party.
REASONABLE AMOUNT OF HOURS
P
atent assertion entities (”PAEs”: companies that buy patents to enforce them for money) can commonly use “the cost of litigation” as leverage for settlements and licensing from businesses that make products. One tool to fight back against “the cost of litigation” by PAEs is 35 U.S.C. § 285, which allows the recovery of fees and costs, where “[t]he court in exceptional cases may
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award reasonable attorney fees to the prevailing party.” As clarified in Octane Fitness v. ICON Health & Fitness, an exceptional case is one that “stands out from others” based on the “strength of the party’s litigation position” or “the unreasonable manner in which the case was litigated.” Once a district court determines that a case is exceptional, the prevailing party
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To determine a reasonable number of hours, courts review billing narratives and consider whether the time spent and tasks performed were reasonable. For instance, courts refuse to award fees for duplicative work or tasks that were unnecessary to the client’s litigation. And, under Hensley v. Eckerhart, courts require counsel to exercise their “billing judgment” and omit this duplicative or unnecessary work from the fees motion. The moving party bears the burden to demonstrate it exercised billing judgment. Courts expect the movant to either write some billable time off or explain why none of the time needed to be written off. Failing to do either may cause the court to BACK TO CONTENTS
exclude fees for some hours, and possibly reduce the total award by a flat percentage as well.
REASONABLE HOURLY RATE AND DIVISION OF LABOR When determining a reasonable hourly rate, courts often lower an attorney’s per-hour rate if it is higher than similar attorneys charge in the geographical location where the litigation occurs. Prior cases allowing a similar or higher hourly rate are strong evidence that an attorney’s hourly rate is reasonable. Courts also accept industry reports and analytics as evidence of what attorneys in the relevant location charge. Courts also consider which professionals worked on each task. Courts are extremely hesitant to allow a prevailing party to recover attorney rates for administrative tasks. And, courts are wary of topheavy billing, where partners bill the majority or all of the time spent on the litigation. Courts, in most fields of litigation, frequently reduce the
fee motion discounts the rate for partner time spent on tasks that otherwise may have been performed by an associate. When a mix of partners and associates work on a patent case, courts consider the experience level necessary for a given task or stage of litigation. Courts are more willing to grant fees if counsel offers a logical justification for the staffing choices, even if the majority of the time is billed by partners.
WHEN SEEKING FEES, PROPER JUDGMENT IS KEY When making motions for fees under 35 U.S.C. § 285, counsel should provide specific billing records and explain what time was omitted through the counsel’s “billing judgment.” If such records contain confidential and/or privileged information, counsel has several options including: (1) filing the records under seal; (2) redacting privileged information from the records, while still leaving sufficient information for
To the extent partners bill the majority of the fees, explaining the necessity of experience to the litigation lowers the chance that the court will reduce the award. requested fee award if the majority of work is billed by partners. In patent litigation, however, courts almost never reduce the fee award based on “top-heavy” billing. Instead, courts recognize the specialized nature of patent litigation and the necessity for experienced representation. This is especially true if the litigation is complex or includes multiple jurisdictions. The court is also more likely to find the top-heavy billing reasonable if the BACK TO CONTENTS
opposing counsel and the court to evaluate the scope of the work performed; and (3) offering to submit complete records to the court for in camera review to preserve privilege. However, failure to provide sufficiently detailed records or exercise “billing judgment” will cause the court to reduce the fee award. To the extent partners bill the majority of the fees, explaining the necessity of experience to the litigation lowers the chance that the
court will reduce the award. In certain situations, it may be better to preemptively discount partner time spent on tasks that may require less experience, to demonstrate to the court that counsel exercised proper “billing judgment.” Finally, when citing prior cases as evidence of reasonable fee awards, patent counsel can highlight the distinction between specialized patent litigation and general litigation. Patent litigation case law weighs against reductions in fees for “top-heavy” billing and allows for higher hourly billing rates than might be reasonable in other fields of litigation.
Lionel Lavenue is a partner at Finnegan. He focuses his practice on patent trial litigation and has argued over 200 patent cases. He has also led the filing of more than 125 IPR petitions and covered business method (CBM) petitions. lionel.lavenue@finnegan.com Joseph Myles is an associate at Finnegan. He focuses on patent litigation in a range of patent venues, including district courts, the Patent Trial and Appeals Board (PTAB), and the Court of Appeals for the Federal Circuit. joseph.myles@finnegan.com
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LEGAL OPERATIONS
How to Drive Efficiencies and Savings in Critical Legal Vendor Relationships By JOE POLIZZOTTO
S
ince the rise of corporate law departments in the early 1990s, the management of outside counsel and related law department vendors has occupied a central focus. There has probably been more ink spilled on this topic than on any other aspect of how law departments manage their affairs. Truth be told, even with the advent of new technologies that have greatly
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increased the options for how legal services are delivered to corporate clients, a number of familiar themes continue to dominate the dynamic over how law departments relate to outside counsel. There have been several discernible shifts in recent years over how outside counsel and other legal vendors are chosen. It wasn’t all that long ago that the selection and
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retention of outside counsel rested entirely with the general counsel and the lawyers within the organization’s legal department. With the emergence of legal operations as a key discipline within most corporate law departments, however, it is not surprising that those professionals play a central, if not dominant, role in the selection process. Legal operations personnel BACK TO CONTENTS
often serve as a critical bridge to the organization’s procurement area, which is also more directly engaged in the affairs of law departments than they ever have been. These developments have meant more and better processes — more carefully crafted Requests for Proposals (RFPs), greater reliance on metrics, use of more formalized retention methods like Master Service Agreement (MSAs) and a greater willingness to “shuffle the deck” in terms of the vendor/outside counsel mix. While the days of legacy counsel closely allied with corporate lawyers are not over, now more than ever
challenged themselves to be more diverse and more inclusive. It is logical that those goals will also shape their external relationships. Here again, metrics are key, but more than that, companies are increasingly showing a willingness to insist on real and substantial diversity, even to the extent of requiring upfront agreements on diversity clawbacks on invoices if the promised diverse team does not materialize on a given project. Another novel development in the billing process has been the willingness of certain companies to offer early payment discounts.
the use of scorecards with easily understood metrics to assist in the evaluation process.
Joe Polizzotto is Senior Vice President, Strategy and Client Services, at QuisLex. He has experience in the financial industry as General Counsel of Deutsche Bank Americas and Lehman Brothers, including managing financial contracts and regulatory implementation projects while at these leading global banks. He has substantive knowledge of the internal processes at financial institutions, how escalations are managed and how firms look at contract risk and manage agreement data.
Stated simply, value is focused on how the company gets the highest quality legal services for the lowest possible cost. corporations appear to be willing to alter the landscape in the elusive quest for finding the best possible value.
VALUE IN VENDOR SELECTION Stated simply, value is focused on how the company gets the highest quality legal services for the lowest possible cost. While these two factors were in the past perhaps skewed toward the desire to obtain the best possible legal advice or service regardless of cost, the terrain has shifted, in part through the influence of legal operations and procurement professionals. It is now more equally balanced between the perceived excellence of the advice or service and its cost. Considerations around having a truly diverse pool of outside counsel and vendors often shape the selection process. Corporations in the United States have correctly BACK TO CONTENTS
Law firms and legal vendors often experience inordinate delays in payment. A commitment on the part of the company to pay these invoices within, say, 10 days, but at an agreed upon percentage discount to the bill, might be a bargain firms and vendors are willing to accept. There are things to consider before companies offer this as an option. Their own ability to adequately review the invoice for compliance with their policy guidelines within the stated time frame is one. The possibility that the law firms will inject some fat, or at least not carefully remove the excess fat before rendering the bill, is another. Finally, in overseeing these relationships, several best practices have emerged, including having regular meetings to discuss the performance of the law firm or vendor. These meetings should happen at least once a year and should include NOVEMBER 2023
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FEATURE
Global Hiring: Is Your Contractor Really an Employee? By MIRANDA ZOLOT
G
lobal hiring is fast becoming a strategic imperative for companies competing in the post-pandemic marketplace. Smart organizations want to look for talent everywhere and build global teams. This might mean hiring full-time employees as well as contractors. Hiring contractors allows companies to be flexible and nimble with their talent strategy. However, misclassifying workers as contractors when they’re really doing the work of
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full-time employees can lead to both monetary liabilities and penalties, as well as an increased permanent establishment risk. Therefore, it is crucial to evaluate each contractor role in each country to ensure you aren’t unknowingly putting your company at risk.
IS YOUR CONTRACTOR REALLY AN EMPLOYEE? Employers need to know what defines an employer-employee relationship versus an employer-contractor
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relationship. There are a myriad of laws and regulations that address that issue. While the specifics may vary between roles and regions, here are a few basic guidelines to help you determine how to classify your people: Business Intent: What is the business intent for hiring this person? If they were hired to accomplish a specific task or project, they might be a contractor. But if their role is to provide ongoing operational support, then they’re likely an employee. Duration: What is the duration of the task this person is being hired to do? Perhaps they are filling in until you find a full-time employee, or they are supplementing staff during a seasonal rush. Specified durations typically indicate a contractor, whereas workers who are brought on indefinitely are more likely employees. Control: How much control or supervision do you have over this worker? If you tell them where and when they must work, that is an indication of an employee rather than a contractor. Also, if they are limited to providing services exclusively to your company, it makes them more likely to be considered an employee. Integration: How deeply integrated is this person in your organization? Do they have a corporate email address and BACK TO CONTENTS
systems access identical to fulltime employees? Are they included in company social events or regular meetings? The more integrated into the daily workings of your business a contractor is, the more likely they should be classified as an employee.
WHAT IS AT STAKE? Whether or not a worker is properly classified as an employer or contractor is one of the most significant elements of global hiring and is rife with a host of legal and financial implications. The classification
for their employees. Failure to pay employer taxes and social contributions is where most companies run into trouble as a result of the employee vs. contractor debate. Jurisdictions rely on employment tax revenue and are diligent about receiving those funds. Misclassifying workers can be considered tax evasion in addition to the underlying potential liability for unpaid contributions. Contractual Considerations: Employment contracts often include provisions related to job responsi-
Failure to pay employer taxes and social contributions is where most companies run into trouble as a result of the employee vs. contractor debate. determines the rights, obligations, and responsibilities of both the worker and the hiring company. These vary among jurisdictions, but generally, the risks and obligations may include: Employee Wages and Benefits: Employees are generally entitled to various benefits and protections including minimum wage, overtime pay, paid leave, health insurance, retirement or pension plans, vacation/PTO, and workers’ compensation. Contractors, however, are usually not eligible for these benefits, and misclassifying workers as contractors to avoid paying these costs can lead to legal actions for unpaid wages and benefits as well as regulatory fines, and late payment penalties. Taxation and Social Security: Contractors typically pay their own taxes, while companies are responsible for payroll tax and other obligations (like social security) BACK TO CONTENTS
bilities, confidentiality, intellectual property rights, and non-compete agreements, whereas contractors may have separate service agreements. Misclassifying workers can result in contractual disputes or issues related to liability and intellectual property ownership. Historically, these contracts have been difficult to create and keep current, but modern hiring platforms have streamlined the process with jurisdiction-specific templates. Employment Protections: Different jurisdictions have specific labor regulations that govern employees’ rights and protections. Employees often have maximum probation periods, rights to collectively bargain, and restrictions on dismissal. Contractors do not have these protections and are only entitled to the remuneration and notice negotiated in their contract. Like most business decisions, properly classifying workers results
in finding a balance between opportunity, risk, and money. What are the drivers for global hiring? How effective or efficient is the opportunity to source talent beyond your own borders? How much risk will you bear by playing loose with classification? And how much will it cost to bring someone on as an employee vs. a contractor? Understanding the risk landscape around worker classification will ultimately help you advise your company as it looks to hire globally. Sophisticated hiring of properly classified contractors and employees positions your company to leverage global talent while protecting your brand reputation, strategic advantages, and ultimately your bottom line.
Miranda Zolot is the General Counsel of Oyster, a global employment platform. She has more than 20 years experience as an in-house legal counsel, and is a charter member of TechGC, a peer community for General Counsel.
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