Employer Update New York’s Appellate Court

May 2014
Employer
Update
New York’s
Appellate Court
Sends a Warning
Shot to Employers
Regarding
Choice-of-Law
Provisions in
Restrictive
Covenant
Agreements
By Gary D. Friedman and
Celine J. Chan
In This Issue
1New York’s Appellate Court
Sends a Warning Shot to
Employers Regarding Choiceof-Law Provisions in Restrictive
Covenant Agreements
6The Enforceability in California
of Choice-of-Law Provisions
and Forum Selection Clauses
in Non-Compete Agreements
On February 7, 2014, in Brown & Brown, Inc. v. Johnson, 115 A.D.3d 162,
980 N.Y.S.2d 631 (4th Dept. 2014), leave to appeal granted, 2014 WL
1767093 (4th Dept. May 2, 2014), the New York Appellate Division, Fourth
Department, issued a significant warning to employers who often include
choice-of-law provisions in their employment agreements, that even if the
chosen state’s law bears a reasonable nexus to the transaction at issue,
such provisions may not necessarily be enforced by New York courts if they
are inconsistent with New York’s strong public policy concerning restrictive
covenants. Specifically, Johnson should cause employers to carefully
evaluate governing law provisions in agreements containing restrictive
covenant clauses, and their enforceability where other states’ public policies
regarding such restraints are distinct. In refusing to apply an employment
agreement’s Florida choice-of-law provision, the Johnson Court found that
Florida law concerning restrictive covenants offended the public policy
of the Court’s sitting state, New York. According to the Appellate Division
decision, the state of the parties’ chosen law must not only bear a reasonable
relationship to the parties’ transaction, but it also cannot be “truly obnoxious”
to New York’s public policy. Moreover, and of equal significance to employers,
the Appellate Division held that a severability clause, which is common in
most restrictive covenant agreements, may not help save an otherwise
unenforceable restrictive covenant where the court determines that the
employer sought to exploit its superior bargaining power over the employee.
Case Background
In December 2006, Theresa A. Johnson (Johnson) was hired by plaintiffs,
Brown & Brown, Inc. (B&B) and Brown & Brown of New York, Inc. (B&B NY),
insurance brokers, to provide actuarial services for plaintiffs.1 B&B was the
Florida parent company of B&B NY, one of its operating subsidiaries, which
employed Johnson.2 The parent company directed sales strategies, set
sales goals, and provided promotional and educational material for B&B
NY.3 Johnson’s salary was administered in Florida and paid from a Florida
bank account.4
On her first day of work, Johnson was presented with an employment
agreement with a non-solicitation clause, a confidentiality provision, and
an employee non-inducement covenant.5 There was no non-competition
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Employer Update
provision in Johnson’s agreement, a point that would
later be addressed by the Court. The non-solicitation
provision prohibited Johnson from soliciting or
servicing any client of plaintiffs’ New York offices for
two years following termination, and was not merely
limited to the clients whom Johnson serviced or with
whom she otherwise interacted.6 The confidentiality
covenant prohibited Johnson from disclosing plaintiffs’
confidential information or from using it for her own
purposes.7 The non-inducement covenant prohibited
Johnson from inducing or convincing plaintiffs’
New York employees to leave employment with
plaintiffs for two years following termination.8 The
employment agreement was made and entered into
among Johnson, B&B, and B&B NY, and stated that
it would be “governed by and construed and enforced
according to Florida law.”9
According to the [New York]
Appellate Division decision, the
state of the parties’ chosen law
must not only bear a reasonable
relationship to the parties’
transaction, but it also cannot be
“truly obnoxious” to New York’s
public policy.
In February 2011, Johnson was involuntarily
terminated without cause by plaintiffs, and she
subsequently obtained employment with defendant
Lawley Benefits Group, LLC, an industry competitor.
Johnson’s former employers immediately brought
suit asserting four causes of action against Johnson
and/or her subsequent employer for: (i) breach of the
non-solicitation, confidentiality and non-inducement
covenants; (ii) misappropriation of confidential, and
proprietary information; (iii) tortious interference with
prospective and existing business relations; and (iv)
tortious interference with, and inducement to breach,
the employment agreement.10
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On defendants’ motion for summary judgment, the
New York trial court determined that the Florida
choice-of-law provision in the employment agreement
was unenforceable because the agreement “bore no
reasonable relationship to the state of Florida,” and
that New York law should govern the contract claims.11
It also granted defendants’ motion with respect to
plaintiffs’ first cause of action, except to the extent
plaintiffs could establish that Johnson violated the
non-solicitation covenant of the agreement, granted
defendants’ motion with respect to the second and third
causes of action, and denied the motion as to plaintiffs’
fourth cause of action. Upon plaintiffs’ motion for reargument, the trial court reinstated the non-inducement
breach portion of plaintiffs’ first cause of action.12
The Fourth Department’s Decision
On appeal, the Fourth Department addressed four
issues, all of which arise frequently in employment
agreements containing restrictive covenants: (i)
whether to enforce the Florida choice-of-law provision;
(ii) whether employers can enforce restrictive
covenants against employees who are involuntarily
terminated without cause; (iii) whether the nonsolicitation provision was overbroad; and (iv) whether
the court must partially enforce an overbroad nonsolicitation provision where the agreement expressly
provides for partial enforcement.
The Fourth Department agreed with the trial
court that the Florida choice-of-law provision was
unenforceable, albeit for a significantly different
reason. Indeed, contrary to the trial court’s findings,
the Court concluded that Florida law “bears a
reasonable relationship to the parties or the
transaction[,]”13 as the parent company has a strong
nexus with Florida and essentially directed and
controlled its subsidiary, B&B NY. But that reasonable
relationship was insufficient to uphold the stated
choice-of-law provision because, according to the
Fourth Department, the chosen law also “must not be
‘truly obnoxious’ to New York’s public policy.”14 In this
case, the Court concluded that Florida law ‒ which
has specific state statutes governing the enforceability
of restrictive covenants ‒ was, in certain material
respects, at odds with New York’s public policy
concerning restrictive covenants.
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Employer Update
Specifically, in analyzing the enforceability of
Johnson’s non-solicitation provision, the Court
focused on two aspects of Florida restrictive covenant
law that conflicted with, and were “truly obnoxious”
to, New York law and public policy. First, Florida law
expressly forbids, by statute, courts from considering
the economic or other hardship imposed upon an
employee by a restrictive covenant in evaluating
the reasonableness of the covenant,15 whereas
the determination under New York law requires
an evaluation of whether a restrictive covenant
“that imposes an undue hardship on the restrained
employee is invalid and unenforceable.”16 Second,
Florida law requires that courts must construe a
restrictive covenant “in favor of providing reasonable
protection to all legitimate business interests
established by the person seeking enforcement,”
whereas under New York law, restrictive covenants
are “almost uniformly disfavored” unless they comply
with prevailing standards of reasonableness.17
Significantly, and of importance to all employers
seeking to enforce restrictive covenants, the Appellate
Division construed the non-solicitation of client
provision in this case as a covenant not to compete,
as Florida law views all “restrictive covenants” as
one category of provisions including any restraint on
trade.18 However, to the extent the Fourth Department
is suggesting that reasonably tailored client nonsolicitation provisions, limited to clients with which the
employee interacted directly during employment, are
disfavored to the same extent that New York courts
disfavor broader non-compete covenants, that view
may not be an accurate assessment of New York
law on the subject. Indeed, New York courts have
expressed the view that non-competition provisions
are disfavored (albeit enforceable under certain
circumstances) under New York law,19 but that nonsolicitation covenants are more palatable because
an “employer has a legitimate interest in preventing
former employees from exploiting or appropriating
the goodwill of a client or customer, which has been
created and maintained at the employer’s expense[.]”20
judgment because Johnson was involuntarily
terminated without cause. In support of their
argument, the defendants had relied on a New York
Court of Appeals decision, Post v. Merrill Lynch,
Pierce, Fenner & Smith, 48 N.Y.2d 84 (1979), in
which the New York high court declined to enforce
a forfeiture-for-competition clause because the
employees were involuntarily terminated without
cause. But in this case, the Fourth Department
declined to extend Post to restrictive covenants that
do not involve forfeiture-for-competition clauses,
such as in Johnson’s agreement.21 Moreover, while
the Court noted that there were issues of fact as to
whether Johnson was terminated “without cause,”
the Court also declined to establish a per se rule
that involuntary termination “without cause” renders
restrictive covenants unenforceable.
The Court further determined that Johnson’s nonsolicitation clause was overbroad and therefore
unenforceable because it unreasonably sought to bar
Johnson from soliciting clients of the plaintiffs with
whom she “never acquired a relationship through
[her] employment.”22 More specifically, according to
the Fourth Department, the non-solicitation provision
purported to unreasonably restrict Johnson from
soliciting, diverting, or accepting, either directly or
indirectly, “any insurance or bond business of any kind
or character from any person, firm, corporation, or
other entity that is a customer or account of the New
York offices of the Company” without regard to whether
Johnson acquired a relationship with those clients.23
Having determined that the law of New York
should govern the enforcement of the employment
agreement, the Court rejected the defendants’
contention that they were entitled to summary
Significantly, and as a warning to employers who draft
such provisions, the Court also rejected the plaintiffs’
argument that the Court should partially enforce the
covenant, even though the agreement expressly called
for partial enforcement in the event portions were
deemed invalid. Such severability clauses in restrictive
covenant agreements are standard protections against
findings of enforceability of one or more covenants.
However, relying on BDO Seidman v. Hirschberg,
a seminal New York Court of Appeals decision
relating to severability and partial enforcement,24 the
Appellate Division identified three bases to support
its decision. First, the Court found that Johnson had
received no benefit or consideration in exchange for
agreeing to the overbroad non-solicitation provision
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Employer Update
beyond continued employment. Second, it observed
that plaintiffs were on notice that the non-solicitation
provision it proposed to Johnson was overbroad
because the BDO Seidman decision had been
rendered more than seven years earlier, leaving no
doubt that restrictive covenants needed to be narrowly
tailored to protect the employer’s legitimate business
interests, and nothing more.25 Third, the Court was
concerned that granting plaintiffs partial enforcement of
the non-solicitation covenant ‒ as opposed to voiding
it entirely ‒ would incentivize employers to “use their
superior bargaining position to impose unreasonably
anti-competitive restrictions …[,]” knowing that they
could fall back on partial enforceability.26
Significant Implications for Employers
In the wake of Johnson, employers seeking to
maximize the enforceability of their restrictive
covenant agreements with out-of-state employees ‒
particularly those with employees in New York ‒ will
not only need to establish that a chosen state’s laws
bear a reasonable relationship to the transaction,
but also will need to scrutinize both states’ restrictive
covenant laws and public policies to analyze any
material variances or conflicts between the chosen
law and the law of the forum state. Johnson is
particularly significant because employers that
operate in multiple jurisdictions often select a choiceof-law provision that is more employer-friendly,
like Florida, where possible. But Johnson’s impact
on choice-of-law provisions goes well beyond the
dichotomy between Florida and New York law. To wit,
the Johnson court specifically referred to three other
states, Illinois,27 Alabama,28 and Georgia,29 that have
also determined that Florida law conflicts with their
public policies concerning restrictive covenants.
Undoubtedly, post-Johnson, employers that choose to
select more employer-friendly states’ governing laws
should consider at least two prophylactic measures
beyond ensuring, at a minimum, that the transaction
at hand bears a reasonable relationship to the chosen
state’s governing law. First, employers should draft
restrictive covenants that at least colorably could be
found enforceable under even the more employeefriendly state law of the sitting court. Indeed, an
overbroad and overreaching restrictive covenant will
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only further highlight for the court the stark contrast
between two states’ respective policies, to the extent
one state is more employer-friendly than the other, or
forbids consideration of certain factors that the other
requires. Second, employers should be prepared to
demonstrate factually why the chosen state’s law is
reasonable when applied to the restrictive covenant,
why the chosen state’s law does not offend the public
policy of the state in which the action is venued,
and why application of the chosen state’s law would
not lead to unreasonably harsh results. Employers
should also recognize that while the Johnson court
focused its analysis on the enforceability of a nonsolicitation provision, it construed this provision as if
it were a more restrictive non-compete provision, an
approach which might surprise many employers who
may believe that they are enhancing the likelihood
of enforcing their non-solicitation covenants by not
including a more restrictive non-compete provision.
Johnson also serves as a warning to employers
that even an express severability provision will
not necessarily save an otherwise overbroad or
overreaching restrictive covenant. In BDO Seidman,
the New York Court of Appeals adopted what it
labeled the more “flexible position” with respect to
partial enforcement, holding that where the employer
demonstrates that it did not overreach, and in
good faith sought to protect its legitimate business
interests consistent with reasonable standards of
fair dealing, partial enforcement may be justified.30
However, where an employer offers only employment
or continued employment as consideration,
where an employer has been put on notice that
its restrictive covenant is overbroad by earlier
enforcement decisions, and where an employer is
in a superior bargaining position (which is often the
case), New York courts may not hesitate to strike
the unreasonable restrictive covenant in its entirety.
Notwithstanding Johnson, the Fourth Department’s
severability holding may not be illustrative of the
views of other departments in the Appellate Division,
but rather highlights that such a severability inquiry
necessarily involves assessing the specific factors
identified in BDO Seidman. In all events, in light of
the Court’s reasoning in Johnson, employers are
advised not to assume that they knowingly can risk
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Employer Update
overreaching in drafting restrictive covenants, and
simply expect a court to save them by carving out
those more unpalatable provisions. Rather, employers
should review carefully, and draft within, the current,
acceptable contours of restrictive covenants (with
which courts will expect employers to be familiar),
consider offering employees more than continued
employment as consideration, and ensure that
employees are given sufficient time to consider the
covenants and review their options with counsel.
22.Id. (citing Scott, Stackro & Co., C.P.A.’s, P.C. v. Skavina,
780 N.Y.S.2d 675 (3d Dept. 2004) and BDO Seidman, 690
N.Y.S.2d 854).
1. Brown & Brown, Inc. v. Johnson, 980 N.Y.S.2d 631, 635
(4th Dept. 2014).
26.Johnson, 980 N.Y.S.2d at 641.
2. Id. at 636.
3. Id. at 635.
4. Id.
5. Id.
6. Id.
7. Id.
23.Id. at 639-40.
24.In BDO Seidman, the Court also held that a restrictive
covenant was overbroad to the extent it applied to clients
the defendant had not served significantly while employed,
held that partial enforcement of the restrictive covenant
was warranted, and then remitted on the issue of the
validity of a liquidated damages provision.
25.BDO Seidman, 690 N.Y.S.2d at 859.
27.Brown & Brown, Inc. v. Mudron, 887 N.E.2d 437 (Ill. App.
Ct. 3d Dist. 2008).
28.Unisource Worldwide, Inc. v. South Central Alabama
Supply, LLC, 199 F. Supp.2d 1194 (M.D. Ala. 2001).
29.Carson v. Obor Holding Company, LLC, 734 S.E.2d 477
(Ga. Ct. App. 2012).
30.BDO Seidman, 690 N.Y.S.2d at 861.
8. Id.
9. Id. at 635-36.
10.Id. at 635.
11.Id.
12.Id. at 635-36.
13.Id. at 636.
14.Id.
15.FLA. STAT. § 542.335(1)(g)(1).
16.Johnson, 980 N.Y.S.2d at 637 (citing BDO Seidman v.
Hirshberg, 690 N.Y.S.2d 854 (1999)).
17.Id.
18.Id. at 638.
19.Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 69 (2d Cir.
1999); see also Greenwich Mills Co. v. Barrie House Coffee
Co., 91 A.D.2d 398, 401 (2d Dept. 1983) (explaining that
in evaluating the enforceability of a restrictive covenant,
“much will depend on whether the covenant involves a total
ban on competition with the former employer or … the far
lesser restriction of a ban on solicitation of its customers.”).
20.BDO Seidman, 690 N.Y.S.2d at 391-92.
21.Johnson, 980 N.Y.S.2d at 639.
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May 2014
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Employer Update
The Enforceability in California
of Choice-of-Law Provisions
and Forum Selection Clauses
in Non-Compete Agreements
By Christopher J. Cox, David R. Singh, and Bambo Obaro
The ability to prevent a key employee from joining
a competitor is becoming increasingly important in
the current business climate where employees are
often one of the most valuable assets of a company.
While non-compete agreements are generally an
effective way to accomplish this goal, the law on the
enforceability of non-compete agreements is not
uniform across all states. Therefore, seeing that the
law best suited for your business is applied in any
subsequent dispute is crucial when drafting noncompete agreements.
Choice-of-Law Provisions
Choice-of-law provisions are generally an effective
way of choosing the governing law at the time of
contract formation. A company often picks the law of
a favorable, defensible jurisdiction and assumes that
it is adequately protected. However, courts in some
jurisdictions will not enforce a foreign state choice-oflaw provision if the court determines that the forum
state has a materially greater interest in applying its
own laws.
For example, several California courts have found
under the facts and circumstances presented, that
California’s strong public policy in favor of employee
mobility trumped a choice-of-law provision in a noncompete agreement where the chosen law conflicted
with California law. California public policy in favor of
employee mobility and against restraints of trade is
codified in California Business and Professions Code
Section 16600. Pursuant to Section 16600, noncompete agreements are invalid under California law
unless they fall within one of three narrow statutory
exceptions. See, e.g., Cal. Bus. & Prof. Code § 16600
(“every contract by which anyone is restrained from
engaging in a lawful profession, trade, or business
of any kind is to that extent void”); Edwards v. Arthur
Andersen LLP, 44 Cal. 4th 937, 942 (2008) (“We
conclude that section 16600 prohibits employee non-
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competition agreements unless the agreement falls
within a statutory exception”).
In determining the enforceability of choice-of-law
provisions, California courts will first determine
(1) whether the chosen state has a substantial
relationship to the parties or their transaction, or (2)
whether there is any other reasonable basis for the
parties’ choice of law. If neither test is met, the court
will not enforce the parties’ choice of law. If, however,
either test is met, the court will next look to whether
application of chosen state’s law would be contrary to
a fundamental policy of California. If there is no such
conflict, the court will enforce the parties’ choice of
law. If, however, there is a fundamental conflict with
California law, the court will then determine whether
California has a materially greater interest than the
chosen state in the determination of the particular
issue. If California has a materially greater interest
than the chosen state, the choice of law shall not be
enforced. Nedlloyd Lines B.V. v. Superior Court, 3
Cal. 4th 459, 464-66 (1992). In applying this test when
evaluating restraints on trade, California courts have
often found based upon the facts and circumstances
presented, that California has a materially greater
[S]everal California courts
have found under the facts
and circumstances presented,
that California’s strong public
policy in favor of employee
mobility trumped a choice-oflaw provision in a non-compete
agreement where the chosen law
conflicted with California law.
interest in the application of its laws in the context
of non-compete agreements and that California’s
interests would be more seriously impaired by
application of the chosen state’s laws. See Application
Grp., Inc. v. Hunter Grp., Inc., 61 Cal. App. 4th 881,
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Employer Update
902, 72 Cal. Rptr. 2d 73, 86 (1998) (“California has
a materially greater interest than does Maryland in
the application of its law to the parties’ dispute, and
… California’s interests would be more seriously
impaired if its policy were subordinated to the policy
of Maryland.”); Davis v. Advanced Care Technologies,
Inc., CVS06 2449 RRB DAD, 2007 WL 2288298 (E.D.
Cal. Aug. 8, 2007) (“California has a ‘materially greater
interest’ in the outcome of this case than Connecticut,
and … California’s interests would be more seriously
impaired by enforcement of the parties’ contractual
choice-of-law provision than would the interests of
Connecticut if California law were applied.”)
Each state has its own conflicts of laws approach
and tolerance, or lack thereof, for non-compete
agreements. Indeed, several courts outside of
California have also considered this issue and chose
to disregard the parties’ choice of law. See DeSantis
v. Wackenhut Corp., 793 S.W.2d 670, 680-81 (Tex.
1990) (collecting cases) but see DGWL Investment
Corp. v. Giannini, C.A. No. 8647-VCP (Del. Ch. 2013)
(finding that although California had a significant
interest in the resolution of the case because all of the
parties were located in California and the agreement
was negotiated in California, it was not materially
greater than Delaware’s interest. Indeed, when parties
have ordered their affairs voluntarily through a binding
contract, Delaware law is strongly inclined to respect
their agreement, and will only interfere upon a strong
showing that dishonoring the contract is required to
vindicate a public policy interest even stronger than
freedom of contract.) Thus, even if the parties include
a choice-of-law provision designating a foreign state’s
law as governing an employment contract, it should
not be considered risk free.
Forum Selection Clauses
Although many jurisdictions will apply the law of the
forum rather than honor the parties’ choice of law
when determining the enforceability of a non-compete
agreement, the chances of those courts respecting
forum selection clauses are much higher.
For example, despite California’s strong public policy
against the enforcement of non-compete agreements
under California law, forum selection clauses are
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considered prima facie valid and enforceable unless
the party challenging enforcement shows the clause
is unreasonable under the circumstances. A forum
selection clause may be deemed unreasonable if
(1) its incorporation into the contract was a result of
fraud, undue influence, or overweening bargaining
power, (2) the selected forum is so gravely difficult
and inconvenient that the complaining party will for
all practical purposes be deprived of its day in court,
or (3) the enforcement of clause would contravene
strong public policy of forum in which suit is brought.
Swenson v. T-Mobile USA, Inc., 415 F. Supp. 2d 1101
(S.D. Cal. 2006). Although parties challenging the
application of a forum selection clause have argued
that sending a case to a jurisdiction that enforces noncompete agreements would contravene California’s
strong public policy in favor of employee mobility, this
argument has gained little traction in California.
This issue was squarely addressed in Swenson,
where the plaintiff argued that enforcement of the
forum selection clause (which required claims to be
brought in Washington) would undermine California
Business and Professions Code Section 16600 and
that, being free to argue for application of California
law in another jurisdiction; the reality is that forum
states apply their own law. Id. at 1104. In rejecting
this argument, the court held that the plaintiff was
impermissibly combining the forum selection and
choice-of-law analyses by arguing that enforcement
of the forum selection clause results in the application
of a Washington law which is violative of California
public policy. The court further noted that while a
Washington court’s application of Washington law to
the non-compete agreement at issue may arguably
lead to a result conflicting with the provisions of
Section 16600, the plaintiff was free to argue for the
application of California law and the Washington court
could choose to apply it if appropriate. Id.
The use of forum selection clauses to maximize the
chances of prevailing on a choice-of-law dispute
is often overlooked. Yet, the inclusion of such a
provision in an employment agreement may make the
difference between retaining a company’s most-prized
assets or seeing them leave for the competition.
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Employer Update
Employer Update is published by the Employment Litigation and the Executive Compensation and Employee Benefits practice groups
of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, NY 10153, +1 212 310 8000, www.weil.com.
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lawrence.baer@weil.com
+1 212 310 8334
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+1 212 310 8578
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Practice Group Leader
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jeffrey.klein@weil.com
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Paul J. Wessel
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Nicholas J. Pappas
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