Eastern Food Services, Inc. v. Pontifical Catholic University Services Ass'n

United States Court of Appeals
For the First Circuit

No. 02-2391

EASTERN FOOD SERVICES, INC.,

Plaintiff, Appellant,

v.

PONTIFICAL CATHOLIC UNIVERSITY SERVICES ASSOCIATION, INC.,
and COCA COLA PUERTO RICO BOTTLERS, INC.,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

[Hon. Jay A. García-Gregory, U.S. District Judge]

Before

Boudin, Chief Judge,

Torruella and Howard, Circuit Judges.

Pedro Jiménez with whom Katarina Stipec-Rubio and Correa,
Collazo, Herrero, Jiménez & Fortuño were on brief for appellant.
Luis A. Oliver-Fraticelli with whom Diego A. Ramos and
Fiddler, González & Rodríguez PSC were on brief for appellee
Pontifical Catholic University Services Association, Inc.
Néstor M. Méndez-Gómez with whom Oreste R. Ramos and
Pietrantoni Méndez & Alvarez LLP were on brief for appellee Coca
Cola Puerto Rico Bottlers.

January 20, 2004
 BOUDIN, Chief Judge. This is an appeal by Eastern Food

Services, Inc. ("Eastern") from the dismissal of its antitrust

suit. The defendants in the district court were Pontifical

Catholic University of Puerto Rico Services Association, Inc.,

("University Services") and Coca Cola Puerto Rico Bottlers, Inc.

("Coca Cola"). Because dismissal was on the complaint, we take the

factual allegations of the complaint as true for purposes of this

appeal. Martin v. Applied Cellular Tech., Inc., 284 F.3d 1, 5-6

(1st Cir. 2002).

Eastern is a company based in San Juan, Puerto Rico,

engaged in distributing food and beverage products in Puerto Rico;

this includes sales through cafeteria operations and food and

beverage machines. Pontificia Universidad Católica de Puerto Rico

is a university based in Ponce, Puerto Rico; University Services is

a related entity that provides ancillary services for the

university and has control over its cafeteria and other food

distribution points.

In 1997, Eastern and University Services entered into a

three-year contract, extendable to five years, whereby Eastern

agreed to operate the cafeteria at the university and was given,

for specified payments, the exclusive concession (with a few narrow

exceptions) for other food and beverage distribution inside the

university. Eastern alleges that in 1998, in order to secure a

donation from Coca Cola to the university, University Services

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allowed Coca Cola to place its own food and beverage machines on

the campus and told Eastern to have the machines it was using

removed.

There were negotiations between the parties as to this

and other matters. Ultimately, University Services terminated the

contract, claiming that Eastern had breached its provisions in

various respects; Eastern made similar claims against University

Services. Asserting that it made large investments in reliance

upon the contract, Eastern brought the present suit in federal

district court in 1999 against both University Services and Coca

Cola.

Although the complaint asserts contract, tort, and other

claims under local law (and University Services filed a

counterclaim based on breach of contract), our concern is solely

with Eastern's claim based upon section 1 of the Sherman Act, 15

U.S.C. § 1 (2000). This claim alleged a conspiracy by the two

defendants, through unfair business practices, to eliminate

competition by Eastern in the supply of food and beverage service

within the university. This was, according to the complaint,

unlawful per se and under the rule of reason.

The district court dismissed the antitrust claim on the

merits. The ruling most important to this appeal was that the

complaint failed to allege a valid geographic market; the district

judge said that Eastern's alleged geographic market–-the

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university–-was "extremely narrow" and not "large enough so as to

constitute an economically significant area of commerce." The

local law claims were dismissed without prejudice to their

assertion in Puerto Rico's courts. This appeal followed.

Our review of a dismissal for failure to state a claim is

de novo. Martin, 284 F. 3d at 5-6. In addition to accepting as

true the facts alleged in the complaint, we draw reasonable

inferences in favor of the non-moving party. Id. Nevertheless, we

conclude that this is essentially a contract dispute with possible

attendant tort claims; and it is not a plausible antitrust case,

however tempting may be the lure of treble damages and attorney's

fees.

In substance, Eastern alleges that it had from the

university, through its services auxiliary, something close to an

exclusive contract to provide food services on the university

campus, and that after receiving a large donation for the

university from Coca Cola, University Services broke the contract

in order to transfer to Coca Cola exclusive rights to a part of

Eastern's domain, namely, the vending machine portion of the

business on the campus. Indulging all inferences in favor of

Eastern, we will assume that Coca Cola was complicit in the breach.

The line is not always clear between antitrust violations

and ordinary business wrongs, such as breach of contract or

tortious interference. Indeed, both antitrust and ordinary

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contract or tort claims may sometimes arise out of the same body of

conduct, see Hayes v. Solomon, 597 F.2d 958, 973 (5th Cir. 1979),

cert. denied, 444 U.S. 1078 (1980); IIIA Areeda & Hovenkamp,

Antitrust Law, ¶ 782a (1996); imagine a near monopolist who burns

down the plant of his only competitor. But antitrust claims are

concerned not with wrongs directed against the private interest of

an individual business but with conduct that stifles competition.

Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962).

From the outset, Eastern's description of what happened

raises warning flags for anyone familiar with antitrust law. The

university, like most landlords, controls who may set up shop on

its premises. It could act as the sole on-campus supplier of food

and beverages, allow multiple suppliers, or give exclusive access

to one supplier. Here, before the dispute, Eastern was virtually

the sole supplier of food and beverages; after, Coca Cola has

exclusive control of the vending machine portion of the business.

In all events, antitrust doctrine does not operate by

purely ad hoc judgments as to whether an action adds to or detracts

from competition. Section 1 of the Sherman Act makes unlawful

contracts, combinations and conspiracies in restraint of trade and

the courts have developed algorithms for implementing this

generalization. The easiest way is for the plaintiff to show a

"per se" violation, that is, that the challenged conduct falls

within a small set of acts regarded by courts as sufficiently

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dangerous, and so clearly without redeeming value, that they are

condemned out of hand–-that is without a showing of wrongful

purpose, power or effect. See United States v. Socony-Vacuum Oil

Co., 310 U.S. 150 (1940).

Almost the only important categories of agreements that

reliably deserve this label today are those among competitors that

amount to "naked" price fixing, output restriction, or division of

customers or territories. Augusta News Co. v. Hudson News Co., 269

F.3d 41, 47 (1st Cir. 2001).1 Agreements between a supplier and a

buyer as to a minimum resale price remain per se unlawful, id., but

that category is a narrow one. In this case Eastern invokes a

different category of agreements sometimes labeled per se, namely,

concerted refusals to deal or group boycotts. E.g., Fashion

Originators Guild of Am., Inc. v. FTC, 312 U.S. 457, 465-67 (1941).

As to this last category, the label is deceptive because

lots of arrangements that might literally be described as agreements

not to deal are not per se unlawful. A common arrangement that

involves an agreement not to deal but is far from unlawful per se

is the exclusive dealing contract (e.g., a sole supplier contract,

a exclusive territorial franchise for an outlet). Such arrangements

1
"Naked" means unconnected with any redeeming larger
enterprise. See White Motor Co. v. United States, 372 U.S. 253,
263 (1963). Compare Northwest Wholesale Stationers v. Pacific
Stationery & Printing Co., 472 U.S. 284, 295-98 (1985); Broadcast
Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 20-
21 (1979).

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can be attacked under the rule of reason--i.e., on their facts--but

are not per se violations. Tampa Elec. Co. v. Nashville Coal Co.,

365 U.S. 320, 327 (1961).

Those refusals to deal arrangements that are treated as

per se violations are "horizontal," that is, they are agreements

between competitors. See U.S. Healthcare, Inc. v. Healthsource,

Inc., 986 F.2d 589, 593-94 (1st Cir. 1993). (Even then, not all

such horizontal arrangements are subject to per se treatment or

necessarily violate the antitrust laws, e.g., Northwest Stationers,

472 U.S. at 295-98.). An entity that grants an exclusive franchise

is ordinarily in a vertical, not a horizontal, relationship with the

grantee. XI Hovenkamp, Antitrust Law ¶ 1800a (1998).

What is alleged here is nothing other than an exclusive

dealing arrangement by which one supplier--Coca-Cola--is given the

sole right by the university to supply and stock vending machines

on campus.2 Eastern was itself the beneficiary of just such a

contract--indeed, a broader one since it included other on-campus

food distribution--until it was terminated. There might be

circumstances in which exclusivity was unlawful for Coca-Cola but

2
Eastern's concern with the fact that Coca Cola may have paid
up-front a large sum for the contract in the form of a supposed
donation to the university is a red herring. Whether the
university is compensated by up-front payments, rent, or royalties
(or by construction work allegedly wrung out of Eastern) affects
not the competitive impact but merely the form and amount of
compensation for the exclusive contract.

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not for Eastern; but in neither case does such a contract fall into

the category of a per se violation.

To show an antitrust violation in the transfer of

exclusive rights from Eastern to Coca Cola, Eastern had to commit

itself to show that the new arrangement would have anti-competitive

effects outweighing the legitimate economic advantages that it might

provide. U.S. Healthcare, 986 F.2d at 595; see Fraser v. Major

League Soccer, 284 F.3d 47, 59 (1st Cir. 2002), cert. denied, 537

U.S. 885 (2002). This is usually a demanding and fact-intensive

process, cf. Tampa Elec. Co., 365 U.S. at 329, which is why

plaintiffs almost always allege a per se violation where they can

do so. But plaintiffs are free to urge per se and non-per se

theories at the same time. U.S. Healthcare, 986 F.2d at 593.

Virtually always, anti-competitive effects under the rule

of reason require that the arrangement or action in question create

or enhance market power--meaning the power to control prices or

exclude competition. IIA Areeda & Hovenkamp, Antitrust Law, ¶ 501

(2d ed. 2002). This is not necessarily enough to condemn the

conduct--benefits may outweigh detriments, see Northwest Wholesale

Stationers, 472 U.S. at 295-98 (1985); Broadcast Music, Inc., 441

U.S. at 20-21--but absent market power there is ordinarily no

detriment and no reason to engage in any weighing. Oksanen v. Page

Mem'l Hosp., 945 F.2d 696, 709 (4th Cir. 1991), cert. denied, 502

U.S. 1074 (1992).

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 Thus, the identification of market power is ordinarily the

first step in any rule of reason claim under section 1. U.S. v.

Visa, U.S.A., Inc., 344 F.3d 229, 238 (2d Cir. 2003); Valley

Liquors, Inc. v. Renfield Importers, Ltd., 822 F.2d 656, 666 (7th

Cir. 1987), cert. denied, 484 U.S. 977 (1987). This in turn

requires the identification of some economic market in which power

can be measured and the consequences of the act or transaction

assessed. Indeed, "virtually all courts applying the rule of reason

require the plaintiff to define the product and geographic market

in which competition is allegedly restrained . . . ." VII Areeda,

Antitrust Law ¶ 1503b, at 376 (1986).

So how is market power to be assessed? As to power over

price, the conventional way is to determine whether the relevant

actor or combination has a sufficient percentage share of a

"relevant market" to give it or them power to raise price over cost

without losing so many customers as to defeat the effort. Todd v.

Exxon Corp., 275 F.3d 191, 199 (2d Cir. 2001). Where exclusion

rather than exploitation is the concern, market share figures help

gauge the potential impact of restrictive conduct on suppliers or

purchasers. See Tampa Elec. Co., 365 U.S. at 327. A defendant's

high share is only a presumptive basis for inferring market power

(entry barriers to the market may be very low); but a low share is

almost always an indication that the defendant lacks market power.

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 Here, perhaps University Services has power in an economic

market: after all, it can set the prices charged students for food

simply by making itself the sole distributor. In fact, whether it

has power to raise price to a non-competitive level depends on how

easy it is for students to find other nearby food suppliers. In any

event, if the university has power to charge high prices to those

on campus, it can be exploited without regard to whether it

contracts with Coca Cola or Eastern or does the job itself.

By contrast, competition in the market to supply vending

services--note that this is a different market--could in theory be

affected by a long-term exclusive franchise contract between the

university and Coca Cola: suppose Eastern were the only food

distributor in Puerto Rico beside Coca Cola and the latter's long-

term contracts with various outlets deprived Eastern of the minimum

number necessary to its survival. U.S. Healthcare, 986 F.2d at 595.

Even then, one would have to consider whether Eastern could feasibly

create new outlets by itself. Posner, Antitrust Law 251-52 (2d ed.

2001).

In all events, so far as Eastern's competitive access to

customers is concerned, the key question in market definition is

what other customers Eastern and its competitors can supply and with

what. Here, Eastern described in its complaint the product as

vending machine sales and the geographic area of competition as the

university campus. The district court in dismissing the complaint

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thought that the former was not a meaningful product and the latter

was too small and narrowly defined to be a realistic geographic

market.

We can confine ourselves here to the geographic market and

assume arguendo that supplying food or beverages through vending

machines might be a legitimate product for purposes of market

analysis. See Allegheny Pepsi-Cola Bottling Co. v. Mid-Atlantic

Coca-Cola Bottling Co., 690 F.2d 411, 412 n.1 (4th Cir. 1982). We

also put aside any suggestion that vending sales in the university

are too small in dollar terms to be of interest to the Sherman Act.

Perhaps Section 1 includes a de minimis dollar requirement based on

the interstate commerce element of the offense, Hammes v. AAMCO

Transmissions, Inc., 33 F.3d 774, 780-81 (7th Cir. 1994) (Posner,

J.); IA Areeda & Hovenkamp, Antitrust Law, ¶ 266e, at 296-300 (2d

ed. 2000); but such a requirement, even if it exists, is low, Summit

Health, Ltd. v. Pinhas, 500 U.S. 322, 329 n.10, 329-33 (1991), and

nothing before us suggests that the dollar volume of vending sales

on campus is trivial.

The more important question is the percentage of the

market represented by the university. Consider that if food and

beverage vending within the university is but a modest fraction of

all food and beverage vending distribution in Ponce and Eastern can

serve the Ponce area, then foreclosure of the campus segment of the

market, even by giving Coca Cola the university franchise for a long

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period, cannot prevent Eastern from distributing through other

vending machine outlets. This is just another way of saying that,

except in special circumstances, a contract restricting a small

percentage of a larger available market will have no anti-

competitive effect on that market.

Here, to put matters in a nutshell, the district court

said that the university was obviously a small portion of the

distribution market, measured geographically. Eastern says that the

district court had no business making this determination on a motion

to dismiss; there is, after all, nothing in the complaint that

establishes that Eastern and other vending machine suppliers operate

in a larger market. Eastern also says that even if the district

court could reject the university as a valid economic market for

distribution, Eastern was still entitled to a fall-back opportunity

to conduct discovery to identify some broader but more plausible

market in which foreclosure might still be significant.

As to the first issue, the district court was entitled to

take notice that Ponce is a major city in Puerto Rico and, as a

matter of common experience, to recognize that food and beverage

machines are customarily accessible at a host of public and business

points within cities. The idea that one university campus

represents even a majority of the vending machine sales in a large

city is so improbable that Eastern's own brief makes no such

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suggestion.3 Quite possibly (note Eastern's location in San Juan)

distribution is an island-wide business, but it is enough that it

is at least municipal.

Eastern does say that for students and faculty the campus

may be a geographic market in which they purchase snacks and

beverages, and we would not rule out this possibility without more

information about student habits and nearby locations. See Morales-

Villalobos v. Garcia-Llorens, 316 F.3d 51, 54-55 (1st Cir. 2003).

But, as noted, this student-faculty market, even if real, is already

captive to the university and a change in exclusive distributors

does not further restrict it. Eastern, by contrast, could be

affected by being excluded from the campus, but it is a distributor

which, if it can serve the university, is also capable of serving

other outlets in Ponce.

At oral argument, Eastern's counsel said that his client

did not need to identify the geographic and product market in the

complaint and could have merely alleged anti-competitive effects in

"a valid economic market." Even if this were so--and different

views might be taken on this issue--it would be no excuse for

3
In fact, the students represent at most a few percentage
points in Ponce's population. According to its web cite, Ponce
(Puerto Rico's second largest city) has about 194,000 people; and
a web site for colleges (xap.com) reports the student population of
the university as 7,150. Conceivably, such precise information
amounts to adjudicative facts subject to Fed. R. Evid. 201; but in
any event the data bear out the background inferences drawn in the
text.

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sustaining a complaint that had shown itself to be inadequate based

on the drafter's candor. Jackson v. Marion County, 66 F.3d 151, 153

(7th Cir. 1995) (Posner, J.). The time of judges and lawyers is a

scarce resource; the sooner a hopeless claim is sent on its way, the

more time is available for plausible cases.

This brings us to Eastern's fall-back position; as already

noted, Eastern argues that even if its initial claim was doomed, it

was entitled to add new allegations to the complaint, conduct

discovery or both--aimed at developing other market definitions or

theories of antitrust violation. Specifically, Eastern says that

in opposing the motion to dismiss, it told the district court that

it might eventually urge that the market was all of Ponce or even

island-wide, depending upon what discovery revealed.

This argument has several variations, and we start with

the easiest, namely, the possibility of amending the complaint.

Once the adversary has answered, amendment is no longer allowed as

of right, Fed. R. Civ. P. 15(a), but in general permission is

liberally granted where there is no prejudice. FDIC v. Consol.

Mortgage and Fin. Corp., 805 F.2d 14, 16 (1st Cir. 1986). It is

often granted not only pretrial but after a dismissal for failure

to state a claim where the court thinks that the case has some

promise and there is some excuse for the delay. See 6 Wright &

Miller, Federal Practice and Procedure § 1488, at 652-69 (2d ed.

1990).

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 Refusals to allow amendment are reviewed only for abuse

of discretion, Resolution Trust Corp. v. Gold, 30 F.3d 251, 253 (1st

Cir. 1994), but district judges do not customarily aim to defeat

valid claims. Here, little had occurred at the time of dismissal

beyond the filing of motion papers. It is a fair guess that if

Eastern had moved to amend the complaint after the dismissal and had

offered the court some hope of an amendment raising a plausible

antitrust claim, amendment would have been allowed. But Eastern did

not move to amend and, even now, it neither has a plausible case nor

understands what one would require.

Despite some initial confusion, today exclusive dealing

contracts are not disfavored by the antitrust laws. Compare

Standard Oil Co. of Cal. v. United States, 337 U.S. 293, 306-07,

313-14 (1949), with Tampa Elec. Co., 365 U.S. at 334, and Jefferson

Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 45 (1984) (O'Connor,

J., concurring). Rather, it is widely recognized that in many

circumstances they may be highly efficient--to assure supply, price

stability, outlets, investment, best efforts or the like--and pose

no competitive threat at all. XI Hovenkamp ¶¶ 1810-1814b.

Ordinarily, such agreements pose a threat to competition only in

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very discrete circumstances,4 and much sweat and tears have gone

into identifying these criteria. Id. at ¶¶ 1802-1807, 1821.

The best example of a possible threat to competition

exists where a market is already heavily concentrated and long-term

exclusive dealing contracts at either the supplier or distribution

end foreclose so large a percentage of the available supply or

outlets that entry into the concentrated market is unreasonably

constricted. Even here there will normally be no serious effects

in certain conditions (e.g., the contracts are for short terms, new

entry at the supplier or outlet business allegedly restrained is

easy), but, at a minimum, substantial foreclosure is essential and

existing concentration important. See U.S. Healthcare, 986 F.2d at

597; Barr Labs. v. Abbott Labs., 978 F.2d 98, 111 (3d Cir. 1992);

cf. XI Hovenkamp ¶ 1821b-c, at 160-64.

There is no indication that Eastern has any hope of

showing substantial foreclosure in a properly defined market. Yes,

Eastern might well show that supply of products through vending

machines is a geographic market that is municipal, regional or

island-wide: likely it is one of these. But Eastern does not

4
See Jefferson Parish, 466 U.S. at 45 (O'Connor, J.,
concurring) ("Exclusive dealing is an unreasonable restraint on
trade only when a significant fraction of buyers or sellers are
frozen out of a market by the exclusive deal."); Roland Machinery
Co. v. Dresser Indus., Inc., 749 F.2d 380, 394 (7th Cir. 1984)
(Posner, J.) ("[A] plaintiff must prove . . . that an exclusive
dealing arrangement is . . . . likely to keep at least one
competitor of the defendant from doing business in a relevant
market.").

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remotely suggest that so many potential outlets are foreclosed to

it or other competitors by long-term exclusive dealing contracts

or other tactics that survival or new entry is infeasible. Being

in the distributor business, it ought to know enough to make such

an allegation if it were true.

This brings us to the separate and more difficult subject

of allowing discovery without insisting upon an amendment. The

federal rules adopt so-called notice pleading--a "short and plain

statement of the claim," Fed. R. Civ. P. 8(a)--and the case books

are full of generalizations seemingly helpful to Eastern: that

evidence need not be pled; that discovery is available both to

refine claims and to support them; and that claims will be allowed

to go forward upon a wrong theory or no theory at all so long as

some set of facts encompassed by the complaint would allow

recovery.5

Yet the cases also say that it is not enough merely to

allege a violation in conclusory terms, that the complaint must make

out the rudiments of a valid claim, and that discovery is not for

fishing expeditions.6 Often, such sets of dueling over-statements

5
E.g., Morales-Vallellanes v. Potter, 339 F.3d 9, 14 (1st Cir.
2003); Kiley v. Ratheon Co., 105 F.3d 734, 735 (1st Cir. 1997); Am.
Nurses Ass'n v. State of Illinois, 783 F.2d 716, 727 (7th Cir.
1986).
6
E.g., Aulson v. Blanchard, 83 F.3d 1, 3 (1st Cir. 1996);
McCoy v. Ma. Inst. of Tech., 950 F.2d 13, 22 (1st Cir. 1991), cert.
denied, 504 U.S. 910 (1992); Gooley v. Mobil Oil Corp., 851 F.2d
513, 514 (1st Cir. 1988).

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mean that the pertinent variables are too numerous, and the

circumstances too various, to reduce the law to a formula; usually,

the outcome turns on matters of degree. In all events, discovery

is an expensive and burdensome process, and at every stage is

subject to control as a matter of sound judicial judgment.

Nothing here suggests that discovery would be remotely

productive, apart from the random (and insufficient) possibility

that rummaging through Coca Cola's files would produce evidence of

some wholly unknown violation. What Eastern mainly says it wants

to discover is information about market definition, a matter on

which it should already have a good grasp since it is in the

business. The further circumstances that would be needed to make

out a half-way decent exclusive dealing claim (e.g., widespread

foreclosure and concentration) are ones whose existence is not even

hinted at by Eastern.

In this case, four years after the filing of the

complaint, there continues to be no hint of a coherent and promising

antitrust claim. The case remains what it was from the start: a

contract and tort case concerned not about whether an economic

market will become less competitive but about which of two companies

will have exclusive access to supply vending machine food and

beverages on a single campus. Eastern may or may not have decent

claims under local law but it has no claim arising under the Sherman

Act.

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Affirmed.

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