Articles Posted in Books and Movies

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Author: Aaron Gott

There are a lot of lessons you can learn from Wonka. It’s a story about how ingenuity, determination, selflessness, and teamwork can overcome the oppressive adversity of a system that serves entrenched interests.

But it’s also a story about a chocolate cartel. And that offers its own lessons, too. Just ask my four kids, who now understand what I do all day (though I may have overplayed the chocolate-related aspect).

In fact, the whole plot of Wonka revolves around the machinations of this market-dominating chocolate cartel. It’s almost as if the folks over at Warner Bros. Pictures took inspiration from our Antitrust for Kids series and (surely inadvertently) left us out of the credits.

For those who haven’t seen it: Wonka is essentially the origin story of the Willy Wonka from 1971’s Willy Wonka & the Chocolate Factory. Wonka, played by Timothée Chalamet, comes to town with the intent to realize his dream of owning a chocolate shop in a ritzy plaza called the Galeries Gourmet. With little money to his name—twelve silver sovereigns that are all spent by the end of the first tune—he sets out to sell his chocolate on the street the following day. A crowd gathers, and the owners of three preeminent chocolate shops, led by Paterson Joseph’s Slugworth, at the Galeries Gourmet notice.

Spoiler Alert!: in this post, I’m talking about Wonka and there may be some spoilers. So if you haven’t seen it, go watch it, and then come back and read this post.

We learn that these three chocolatiers are, despite identifying themselves as three “fierce rivals,” in fact, the members of a chocolate cartel that has the entire market locked down. And just as soon as upstart Wonka begins trying to sell his chocolate, the cartel goes to work to prevent this competitive threat from upending its lucrative arrangement. Or as the cartel puts it, “If we don’t / get on top of this / we’ll go bust / chocopocalypse! / we’ll cease to exist.

What follows in Wonka is not only a lot of catchy numbers, but also a step-by-step guide into the workings of a successful price-fixing cartel.

  1. Control Price by Controlling Supply

Soon after the members of the chocolate cartel are introduced, we learn the strategy to which they owe their cushy, profitable position: while ostensibly fierce rivals to the outside world, each with their own shops, the chocolatiers actually pool their chocolate in a secret underground vault and strictly control the output so as to artificially depress supply, which ultimately raises prices in a market with pent-up demand.

This is a classic mechanism for a cartel to increase prices without explicitly fixing prices. Rather than attempt to set and discipline cartel members’ prices directly, which can be difficult to administer and is more easily detected by authorities, controlling supply (or production) lets the market do the work of raising prices through the hydraulic action of supply and demand. Output restrictions and price fixing are two sides of the same coin.

A classic example of output controls is the open-and-notorious oil conspiracy known as OPEC.

  1. Conceal Your Meetings and Communications

The chocolatiers’ secret underground vault isn’t just where they store their chocolate reserves; it’s also where they meet to discuss their nefarious business. The lair is underneath a Catholic church run by a frocked, chocoholic Mr. Bean on the take, and to get there, they simply go to a confessional booth, which has a secret elevator to the vault below.

Conspirators often take measures to conceal their communications and meetings, and while real-life cases do not usually involve such ostentatious means, they can still be elaborate. Some use code names and secret email addresses, while others might enlist a supplier to collect and distribute draft pricing announcements while she makes her sales rounds. Conspirators might even have a seemingly coincidental meeting at a charity golf tournament.

And while this cartel was meeting directly in its secret lair, it could have accomplished a similar scheme by integrating Father Bean as the hub of a hub-and-spoke conspiracy. Some notable recent cases have featured accusations of conspiracies facilitated through third-party data aggregators and technology service providers. That kind of conspiracy, though, isn’t quite as conducive to show-tune choreography.

  1. Keep Your Numbers Small

Another reason the chocolate cartel was so successful: it comprises only three competitors who dominate a market. It’s easier to form a cartel in a concentrated, oligopic market. And it’s easier to sustain one, too, for a few different reasons.

The more people who are in on a secret, the more likely that secret is going to get out. It’s important your cartel stays a secret, given that it’s a felony punishable by prison and often means civil liability far beyond what was made from the scheme. This is especially true because the U.S. Department of Justice Leniency Program provides incentives for cartel members to tell on their co-conspirators and cooperate with its investigations. So even if you trust your co-conspirators now, wait until one of them is acquired by a larger company with a strong antitrust compliance program or one of their employees decides to become a whistleblower if for no other reason than to protect their job.

Keeping your numbers small also means that it is less work to detect and punish “cheating” by cartel members, which is inevitable—if they’re willing to cheat the market, you can be sure they’ll cheat each other at every opportunity.

  1. Use the Law to Stop Upstart Competitors

In Wonka, local law forbids the sale of chocolate without a chocolate shop. As one of Wonka’s friends puts it, “You can’t get a shop without selling chocolate, and you can’t sell chocolate without a shop.”

This catch-22 is surely by design. The cartel instinctively calls the police on Wonka the very moment it recognizes him as a competitive threat. The cartel members even make friends with the chief of police—played by Keegan Michael Key—and bribe him with chocolate (and the promise of more) so that he dedicates himself to enforcing the law against Wonka.

Cartels often try to create and use legal barriers to prevent new competitors from gaining a foothold. In the United States, it’s a tale as old as interest group politics: lobby to create barriers to entry through either complex regulatory regimes or licensing schemes that make it harder for others to enter the market and compete against you. And then put your friends in government to enforce those laws with enthusiasm.

Something like this is what happened in North Carolina State Board of Dental Examiners v. FTC: as teeth whitening technology took off, dentists found it extraordinarily profitable. And when non-dentists started offering teeth whitening, the dentists used the state board (conveniently controlled by dentists) to reinterpret the dental scope of practice under state law and start going after non-dentists for the unlicensed practice of dentistry, even though teeth whitening is not actually dentistry.

  1. Scare Consumers Away From Non-Conspirator Rivals

The chocolate cartel also attempts to turn the market against Wonka. First, in front of a crowd comprising Wonka’s intrigued prospective customers, Slugworth declares his expert opinion: “Mr. Wonka, I have been in this business a very long time, and I can safely say, that of all the chocolate I have ever tasted, this is without doubt, the absolute 100% worst.”

Consumers still went wild for Wonka’s “hover chocolates” when Slugworth and his confederates started to float. But that victory was short-lived because of the already-in-motion cartel strategy of using the law against Wonka, which goes to show a successful cartel doesn’t usually rely on just one type of anticompetitive act to achieve its goals.

Later, after a montage of Wonka and his troupe turning to a pop-up retail strategy that allows him to both compete and successfully evade the police, Wonka finally has the financial resources to open a shop. And when he does, the chocolate cartel sabotages him by surreptitiously poisoning his confections with Yeti Sweat, which leads to rapid and uncontrollable vividly colored hair growth. With this, the cartel successfully turned the market against Wonka, and Wonka’s shop was literally destroyed.

Food tampering aside, this is classic group boycott behavior: a concerted effort by firms to persuade customers, suppliers, and other parties in the market not to do business with a rival firm whose competition imposes downward price pressure in the market.

  1. Reach an Illegal Noncompete Agreement

The chocolate cartel at one point convinces Wonka to agree not to compete in exchange for buying his and his friends’ freedom from their indentured servitude to Mrs. Scrubbit.

Paying competitors not to compete is illegal, but the important thing to note here is that it is illegal even if it is just one competitor paying off another. In fact, there is a whole class of “pay-for-delay” antitrust cases, which typically allege brand-name pharmaceutical companies suing generic makers for patent infringement, with the purpose of inducing a settlement whereby the generic makers agree not to introduce their competing products to the market for some period of time.

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Author: Steven Cernak

Most antitrust practitioners, even members of the general public, have a good intuitive sense of what Sherman Act Section 1 is aimed at. Whether you follow the common law’s ancient voiding of “combinations in restraint of trade,” as does Greg Werden for example, or your kindergarten teacher’s instruction to avoid “ganging up,” as explained by Dick Steuer, even beginning antitrust students understand that certain agreements are bad for competition and, so, should be illegal.

But what about Sherman Act Section 2’s prohibition of monopolization? Is there anything in America’s history that might illuminate what legislators were thinking in 1890 or how courts should approach the issue today?

Those are the questions tackled by long-time practitioner and academic Barry Hawk in his 2022 book Monopoly in America. In just under 200 pages, Hawk covers over 400 years of American usage of “monopoly” to find, well, it’s complicated. Americans have hated monopolies for centuries, except for the ones that at least some of them liked, and their understanding of the term has varied over the years. Hawk succinctly explains the twists and turns and draws helpful lessons for today’s practitioners and policymakers.

Anti-Monopoly Tradition? Yes, but…

Hawk divides his survey into chapters covering four distinct American periods: colonial era; Revolution and founding; antebellum; and modern, that is, post-Civil War. In each chapter, Hawk walks through the laws, court opinions, and public statements of the period to illustrate America’s thinking about monopolies at that time. Like other authors, Hawk finds that America does have an anti-monopoly tradition; however, Hawk’s survey shows that that tradition does not take a consistent, linear path. Below, I summarize some of the inconsistencies highlighted by Hawk.

Yes, Americans were against monopolies but what they mean by the term “monopoly” has changed over the centuries. In colonial and early America, “engrossing” and “forestalling” were two of the major concerns captured by the “monopoly” term. Engrossing is roughly “cornering the market,” buying up all the goods so as to increase prices or otherwise control distribution. Forestalling is usually defined as buying goods from the producer or importer before the goods arrived at the designated public market. Concern about both issues waned after the Civil War, especially as American markets grew and demonized forestallers gradually became helpful facilitators or middlemen.

Similarly, pre-Civil War monopoly concerns included government grants of exclusivity to particular private actors. Famous examples include the British East India Company and the Second Bank of the United States. Again, concerns about these “monopolists” faded after the Civil War as worries about large private companies that we now know as “monopolists” grew.

Yes, Americans and their English predecessors were against “monopolies” but sometimes a monopoly was in the eye of the beholder. As Hawk describes, the English principle outlawed monopolies but made exceptions for local grants of exclusive privileges. Sometimes, laws and public opinion only condemned monopolies that served no public purpose, which was determined under a shifting reasonableness standard. In Colonial times, laws and constitutions sometimes made exceptions for local exclusive licenses, patents, and copyrights. Engrossing was a monopoly when it was “hoarding” but not when it was merely “storage,” and the dividing line was far from clear. Now, antitrust law allows state “monopolies” if expressly granted by the legislature and actively supervised. So, Americans definitely have been against monopolies except when they have been for them.

Yes, Americans are against monopolies, but the strength of that opposition has varied over time. Hawk focuses on the cycles since the 1890 Sherman Act: success in the early period with breakups in Northern Securities and Standard Oil; hibernation in the Roaring “20’s and Franklin D. Roosevelt’s first term; then more successes, like Alcoa and AT&T, into the “70’s; followed by more hibernation, with a Microsoft exception, until the 2020 election. So, while the anti-monopoly orientation never goes away, sometimes it remains dormant for quite some time.

Why the Cyclicality?

While Hawk’s fact reporting is interesting, the book probably is at its best when this long-time antitrust guru then offers up his explanation for why some of those facts occurred. At the end of the book, Hawk discusses some factors that he thinks best explain the cycles of monopoly challenges since 1890: political support; popular demand for action; changes in facts and economic conditions; changes in economic theory; legal process concerns; and the predominance of the consumer welfare standard. I will comment on three of them.

Interestingly, Hawk found that “popular support less clearly correlates with aggressive enforcement” than do some of the other elements. He sees no large anti-monopoly groundswell post World War II to accompany aggressive Section 2 enforcement. Today, despite the anti-monopoly push, “the general population appears happy to get ‘free’ platforms and relatively low-cost apps.” I would add the anecdote that at least one ranking of the most admired companies in 2022 was headed by Apple, Amazon, and Microsoft, three companies often accused of being monopolists. As Hawk puts it, popular support is helpful but not necessary to generate aggressive enforcement by the “politicians, academics, and antitrust industry generally.” As another long-time antitrust practitioner described it more than fifteen years ago, it is the true believers in the antitrust religion who often drive enforcement trends.

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Author: Steven J. Cernak

Two months ago, I encouraged all readers of this blog to read Complexity-Minded Antitrust by Nicolas Petit and Thibault Schrepel. As I explained in that article, I think their suggestion that antitrust lawyers and policymakers should consider applying learnings from complexity theory to antitrust questions was a good one.

I hope you heeded my suggestion. Over 1300 others have at least downloaded the article. After reading the article, I wanted to get smarter about complexity as well. I had dipped my toe in the complexity water during my graduate economics studies and early legal career but that was decades ago during complexity’s infancy. How had it developed and how might it apply to antitrust issues?

To get back up to speed, I read several books on the topics. Below, I outline my thoughts on each of them. I encourage other antitrust experts to read these or other materials to stay abreast of where our field might be (should be?) heading. If you have other suggested readings, please let me know.

First, take a look at Neil Chilson’s Getting Out of Control, his short and easily readable book on emergent order that I reviewed for this blog last October. As I described in that review, Chilson uses everyday examples to define emergent order and distinguish it from randomness and designed order. He then builds on those definitions to discuss an example of emergent order near and dear to all antitrusters, the price system. From there, he derives principles for anyone (like antitrust enforcers?) dealing with emergent order to observe: expect complicated results even from simple actions; push decisions down to actors with local information; and be humble. Short, sweet, and by an author with FTC experience, this book is the one to read if you only read one.

Second, I re-watched Understanding Complexity by Scott Page, one of The Great Courses that I had purchased several years ago. I thought this course was a great summary of complexity, how it relates to many disciplines, and how its concepts can apply in many everyday settings. Page defines the attributes of complex systems—diversity, connection, interdependence, adaptation—and distinguishes such systems from others that are really just complicated. From these tools, he derives now familiar concepts like tipping and path dependence and explains why truly complex systems can be harnessed, perhaps, but not controlled. I recommend this course for an easy-to-understand but more complete and formal view of complexity.

(Disclosure: Scott Page lived a few doors down from me in my University of Michigan dormitory. In a hallway full of smart young men with great enthusiasm for Michigan athletics, Page was one of the smartest and most enthusiastic.)

I was disappointed in Complexity: A Guided Tour by Melanie Mitchell. While I was looking for a general description of complexity and its roots, this book went farther afield than I wanted or could appreciate. It covers many disparate subjects—genetics, evolution, biology—and has some interesting history of the science and some of its pioneers; however, Mitchell spends more time talking about that history and justifications for why complexity might be its own separate discipline than I found interesting. I can only recommend it for those interested in math history.

On the other hand, Complexity and the Art of Public Policy by David Colander and Roland Kupers covered just the right amount of complexity background, history, and context before applying it to various public policies. Antitrust gets a brief mention with a very short summary of the U.S. Microsoft case. More generally, the authors try to use complexity theory to begin the development of a third way of thinking about public policy choices, what they call laissez faire activism, as compared to defaulting to having either the market or the federal government do everything. Here are some of the key points that I think make this book, right after Chilson’s, one that antitrust folks should read:

  • The economy and various parts of it can be non-linear and able to self-organize and, so, able to be influenced but difficult to control;
  • Complexity theory and math can clarify choices but will not prescribe solutions;
  • There is a potential tradeoff between efficiency and resiliency that businesses (especially those that misunderstood all aspects of the Toyota Production System) and policymakers should consider;
  • Economic policy is not all of social policy and increasing material welfare is not the single goal of society;
  • Path dependency can exist but not in all cases

Finally, I can recommend Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies by, again, Scott Page, only if you really want to go deep in the weeds on complexity or are managing a group. I had another, more personal, reason for wanting to read it.

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Sculpture Man Controlling Trade

Author: Steven J. Cernak

How do you tie together evolution, the wave, and market prices?  As Neil Chilson explains in his brilliant little book, Getting Out of Control, all are examples of emergent order.  While Chilson is a former FTC leader, this book is not just for antitrust and consumer protection lawyers and economists but for anyone trying to understand what they can, and cannot and should not, control.

The book is about more than policy and certainly more than antitrust policy.  It explores many ways in which emergent order can play a role in your life, both personal and professional.  After all, the subtitle is “Emergent Leadership in a Complex World.” So parts of the book read like a self-help or leadership book.

Those parts might be the least interesting, at least to many of us.  There is nothing objectionable in those sections but there also did not seem to be many new insights from viewing familiar issues through an emergent-order lens.  For example, Chilson describes how changing your habits can change you and your actions and how changing your environment can help change your habits: “If you want to stop eating sugar, don’t visit candy stores.”

But that advice does not seem much different than the directions that many of us have received in various six sigma or other corporate efficiency seminars. Many of mine while at General Motors were based on lessons learned from the Toyota Production System applied to the white-collar office.  There, changing the environment might mean putting yellow taping around the stapler on the table next to the copier to develop the habit of returning it to the same place every time. Good advice that all of us, whether in the workplace a few weeks or decades, need to hear periodically, but not particularly new.

Chilson’s policy discussions, however, do offer fresh and necessary takes on policy issues, like antitrust and other economic regulation, that are especially important today.  He starts by defining emergent order and distinguishing it from both randomness and designed order. Here, emergent order is the complex behavior of a system created by the interactions of many smaller components following simpler rules with no central control. To illustrate the differences among the three types, he uses various actions of a crowd at a sporting event.

As an example of emergent order, consider “the wave” at a large sports stadium — I will use the University of Michigan football stadium. The system, that is, the attendees, engage in the complex behavior of creating the coordinated, observable pattern of a wave moving around the stadium. No central authority controls the wave — some group of students, though not always the same one, tries to start it at different points in the game — and the small components, each fan, follows the simple rule of standing at about the right time. The wave peters out as enough fans grow disinterested.

An example of randomness would be the fans entering the stadium.  As Chilson notes, “you would be hard pressed to predict when any particular fan would arrive and take their seat” (although, at Michigan Stadium, a safe prediction is that fans named Cernak will be in their seats at the one hour to kickoff announcement). Designed order, on the other hand, would be if placards are handed out that, “when everyone holds them up, spell out ‘GO TEAM’ [or a Block M] across the entire stadium.”

Chilson builds on those definitions and examples to examine “the classic economic example of emergent order,” the price system. From these concepts, he derives principles for anyone dealing with emergent order, such as: expect complicated results even from simple actions; push decisions down to those actors with important local information; and be humble.

While the book is not overly technical or academic, its points are well-supported with quotes and “greatest hits” from top economists like Adam Smith, F.A. Hayek and his knowledge problem, Ronald Coase and his theory of the firm, and Elinor Ostrom. Chilson even interviews Russ Roberts, who has been popularizing emergent order on his EconTalk podcast for years.  (Surprisingly, there does not seem to be a reference to Roberts’s It’s a Wonderful Loaf, an ode to the magic and beauty of emergent order that I suggest to all my antitrust students.)

Specifically on antitrust and other regulatory matters, Chilson has high praise for his former boss at the Federal Trade Commission, former long-time Commissioner and Acting Chairman Maureen Ohlhausen. She frequently spoke about the need for the FTC to exhibit “regulatory humility,” a position that I have supported in the past. Chilson also seems to channel Edmund Burke in advocating for a common law approach to policy decisions, rather than some elaborate rulemaking, as the many cases decided with specific and local knowledge in the past end up embodying wisdom that should be respected now and in the future.

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Author: Steven Madoff

Steven Madoff is a former Executive Vice President at Paramount Pictures and General Counsel for its Home Entertainment Subsidiary. He is Of Counsel at Bona Law.

When you see someone acting strangely, do you ever wonder if they are possessed? If you do, it might be because of the everlasting influence of a classic film that I am certain you know: The Exorcist.

One of the great joys of a film is that you can turn down the lights, let your problems disappear, and enter a meditative zone where you become engrossed in the movie and nothing else. You surely know that a lot goes into making a film and that it takes many talented people working really hard to do it well.

But do you ever think about how much thought, work, and fighting (yes, fighting) goes into marketing, distributing, and monetizing a film? Indeed, because films continue to make money for years and sometimes decades after they are made—especially for a classic film like the Exorcist—the battles over revenue and its dissemination can be everlasting.

During my decades at the studios and in the film industry, I had a front row seat to the methods, money, and machinations of the entertainment industry.

Even still, after I left Paramount Pictures, I did not think of myself as an “expert.” I had worked at Paramount for 20 years, the last ten of which I served as Executive Vice President of Worldwide Business and Legal Affairs for the Home Entertainment and Pay Television Divisions. I had also worked at the Motion Picture Association of America for five years in a business development position and then as International Counsel. The Motion Picture Association of America is the trade association representing the interests of the (at the time) seven major Hollywood Studios: Disney, MGM/United Artists, Paramount, Sony Pictures, Twentieth Century Fox, Universal and Warner Bros.

So after 25 years working for the major studios, I knew that I was very experienced and highly knowledgeable about certain aspects of the motion picture and television industries, but I did not think of myself as an “expert” on whose word courts should rely.

That was, anyway, until shortly after leaving Paramount, I started receiving phone calls from other studios involved in one form of litigation or another that were looking for someone who could qualify as an expert and would be willing to render an opinion and possibly testify in court in their litigation. Each one was certain that based on my 25 years of experience in motion picture and television industry business affairs (including all forms of licensing, sales, distribution and acquisition transactions), I would qualify as an ”expert.”

Malcolm Gladwell wrote about the 10,000 hour rule in this book “Outliers.” This rule states that it requires at least 10,000 hours of practice to become an expert in a particular field. I figured that my 25 years of practice in one industry, at a minimum of 40 hours per week, equates to about 50,000 hours that I had practiced in motion picture and television business affairs. Maybe these people were right. As it turns out, my qualifications as an “expert” in multiple cases have never been successfully challenged. That may, in part, be attributed to the fact that I have always been very selective in choosing which matters I offered my services for—I stick with what I truly know.

One of the more interesting cases on which I provided services as an expert witness involved the classic motion picture, “The Exorcist.” The case was before the U.S. District Court for the Central District of California.

For those that don’t know, “The Exorcist” is the 1973 Warner Bros. release which, for many years, was the highest box office grossing horror motion picture of all time. In fact, adjusted for inflation “The Exorcist” is probably still the highest box office grossing horror motion picture of all time. It is certainly in the top five. If you haven’t seen it, you should.

Film finance can be complicated and there are typically investors that put up money or creative services for the film, alongside a studio and others, and, in exchange, they receive a contractual right to participate in the profits of the particular film. These are commonly known as participation agreements.

As often happens in Hollywood, claims were made against Warner Bros., the distributor of “The Exorcist” by a party who has a right to participate in the profits of the film. Basically, the claim was that Warner Bros. had not been properly exploiting “The Exorcist” in subsequent media and therefore the film’s gross revenue and profits were less than they otherwise could have been.

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Note: I co-authored this blog entry with my wife, Mary Bona.

We hope you all enjoyed the holiday season!

Along with the holidays come many traditions. One tradition in our family is to watch the heart-warming, iconic holiday film, It’s A Wonderful Life, starring James Stewart and Donna Reed. It’s no surprise that this film is amongst my wife’s favorites, not only because she loves the old classics, but also because, like the main character George, she is a small-business owner, and, like George’s wife (also named Mary), she loves old homes and fixing up the dilapidated ones.

Frank Capra, the film’s director and producer, was a Sicilian immigrant who grew up in the Italian ghetto of San Francisco. He started from very humble beginnings to become one of the most influential directors of his time. During his acceptance speech for the AFI Lifetime Achievement Award in 1982, Capra stressed his most important values:

“The art of Frank Capra is very simple: …the love of people…coupled with the freedom of each individual, and the equal importance of each individual, [is] the principle on which I based all my films.”

He went on to recall “celebrating” his 6th birthday in the miserable steerage section of a boat full of other terrified immigrants. After 13 awful days at sea, the boat stopped, and Capra’s father brought him up to the deck of the huge ship. “’Chico, look at that!’”, his father cried, “That’s the greatest light since the star of Bethlehem!  I looked up, and there was the statue of a great lady, taller than a church steeple, holding a lamp over the land we were about to enter, and my father said, ‘It’s the light of Freedom, Chico.  Remember that. Freedom.’”

It’s no wonder that, when he finally formed his own independent film production, he titled it “Liberty Films,” and the first thing we see when the movie starts is the tolling of the famous Liberty Bell. Continue reading →

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