Filed 11/5/15 Destinations to Recovery v. Evolve Initiatives CA2/2
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
DESTINATIONS TO RECOVERY, B259011
Plaintiff and Respondent, (Los Angeles County
Super. Ct. No. SC122663)
v.
EVOLVE INITIATIVES LLC et al.,
Defendants and Appellants.
APPEAL from a judgment of the Superior Court of Los Angeles County.
Craig D. Karlan, Judge. Affirmed in part and reversed in part.
Miller Barondess, Brian A. Procel, J. Mira Hashmall, and Casey B. Pearlman, for
Plaintiff and Respondent.
Ross & Silverman, Melanie C. Ross and Lora Silverman, for Defendants and
Appellants.
* * *
Defendants Menachem Baron (Baron) and Justin “Gryphon” Ward (Ward) helped
run plaintiff Destinations to Recovery (Destinations) before leaving to form a competing
business, defendant Evolve Treatment Centers (Evolve). Destinations sought and
obtained a court order preliminarily enjoining Baron, Ward and Evolve from using
Destinations’ trade secrets and proprietary information to operate their competing
business. Defendants appeal the injunction on several grounds. We conclude that the
injunction is valid except as to the provisions barring defendants from initiating contact
with Destinations’ patients or employees, which are overbroad. Accordingly, we affirm
in part and reverse in part.
FACTS AND PROCEDURAL BACKGROUND
I. Facts
Destinations operates treatment facilities for teens with addiction and mental
health issues. Destinations hired Baron and Ward as part of its senior management team,
and employed Ward’s wife as an administrative assistant.
When they were hired, Baron and Ward signed a confidentiality and
nonsolicitation agreement that prohibited them (1) from storing or using certain
“confidential information” and defined confidential information to include customer
information and internal marketing and sales plans, and (2) for three years after their
termination, from soliciting Destinations’ other employees or from soliciting
Destinations’ clients using customer information.
On May 19, 2014, Baron and Ward abruptly resigned. In a mass email addressed
to Destinations’ staff, clients, and investors, Baron and Ward announced that they were
leaving Destinations to provide adolescent treatment services through their own, newly
formed company, Evolve.
After their resignation, Destinations discovered that this departure had been well
planned. Analysis of Destinations’ computers revealed that, prior to Baron’s and Ward’s
resignations, hundreds of Destinations’ business documents—including financial records,
business plans, company procedures, patient photos and contact information, employee
rosters and contact information, vendor and referral lists, marketing materials, and
2
insurance information—had been uploaded into a “Dropbox” shared file folder, and had
been accessed and manipulated by Ward’s wife through an Evolve email address.
According to Destinations’ vice president, these business documents contained
proprietary information that was integral to the ongoing operation of Destinations and
that Destinations had taken steps to keep confidential. Analysis further revealed that
Ward had, on the day he resigned, accessed Dropbox and removed a thumb drive from
his computer; Ward later admitted he gave at least two thumb drives containing
Destinations’ documents to a computer consultant hired by his lawyers.
Baron and Ward had tried to cover their tracks: Ward ran several defragmentation
programs (which have the effect of making it more difficult to recover deleted files) on
his work computer in the days and weeks prior to his resignation; and Baron deleted
dozens of files from his computer the day he resigned, leaving just three documents on
the entire computer. Forensic experts were nevertheless able to recover emails and
deleted files indicating that Baron and Ward had “cut and pasted” large sections of
Destinations’ business plan into Evolve’s business plan; indeed, the metadata from
Evolve’s business plan indicated that the document had originally started as a document
written by Destinations.
Baron also recruited another Destinations employee, Nichum Schapiro (Schapiro),
to join him and Ward at Evolve after sending Schapiro Destinations’ confidential
financial projections and income statement. Baron, Schapiro and an Evolve investor
subsequently tried to recruit other Destinations employees, and offered jobs at Evolve to
Destinations’ contract medical director and contract psychiatrist.
II. Litigation
1
Destinations sued Baron, Ward, and Evolve (collectively, “defendants”) for
(1) knowingly accessing its computer system with intent to obtain property or data (Pen.
1 The complaint names Evolve Initiatives LLC (rather than Evolve Treatment
Centers). However, the complaint also alleges several Doe defendants who are “in some
3
Code, § 502), (2) conversion, (3) misappropriation of trade secrets, in violation of
California’s Uniform Trade Secrets Act (Civ. Code, § 3426 et seq.), (4) breach of
fiduciary duty, (5) intentional interference with a contract, (6) unfair competition, in
violation of the Unfair Business Practices Act (Bus. & Prof. Code, § 17200 et seq.), and
2
(7) breach of the confidentiality and nonsolicitation agreement.
Destinations moved ex parte for a temporary restraining order (TRO) and for
expedited discovery. The trial court granted a TRO enjoining defendants from using
Destinations’ “confidential and proprietary information or documents” and from
contacting any of Destinations’ employees or current or former patients. The court also
ordered expedited discovery, and specifically ordered Baron and Ward to turn over their
computers and phones for analysis. This discovery revealed that defendants’ Evolve
computers contained, in a file called “MotherFer,” Destinations’ confidential projections
for a treatment facility, and that Baron had not returned one of his personal hard drives
containing confidential client information from Destinations (instead, he deleted its
contents).
Destinations then moved for a preliminary injunction. After a hearing, the trial
court issued a 14-page written order. The court based the injunctive relief solely on
Destinations’ claim for misappropriation of trade secrets and confidential proprietary
information. The court noted that the parties’ evidence was disputed, but after outlining
the evidence set forth above, found that “the weight of the evidence is in [Destinations’]
favor.” The court also determined that the hardship to Destinations if an injunction was
not granted was greater than the hardship to defendants if it were.
manner responsible for the events” alleged in the complaint. Thus, our reference to
Evolve covers all Evolve entities.
2 Defendants filed a cross-complaint, but it is not relevant to the issues on appeal.
4
The trial court denied Destinations’ request to enjoin defendants from opening an
Evolve residential facility in Ojai, California, but issued a preliminary injunction with six
provisions:
No. 1: Defendants are “restrained and enjoined from misappropriating
[Destinations’] trade secrets and confidential information”;
No. 2: Defendants are “restrained and enjoined from using any confidential or
proprietary information or documents belonging to [Destinations]”;
No. 3: Defendants must “return all confidential and proprietary documents
belonging to [Destinations], whether in electronic or hardcopy format”;
No. 4: Defendants are “restrained and enjoined from altering or destroying any
electronic evidence, including use of any hard drive optimization or ‘wipe’ programs”;
No. 5: Defendants are “restrained and enjoined from initiating contact with any of
[Destinations’] employees”; and
No. 6: Defendants are “restrained and enjoined from initiating contact with any of
[Destinations’] current or former patients.”
Defendants timely appeal.
DISCUSSION
Defendants challenge the propriety of the preliminary injunction. When deciding
whether to issue a preliminary injunction, a trial court “‘weighs two interrelated factors:
the likelihood the moving party ultimately will prevail on the merits, and the relative
interim harm to the parties from the issuance or nonissuance of the injunction.’” (Whyte
v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, 1449-1450, quoting Hunt v. Superior
Court (1999) 21 Cal.4th 984, 999 (Whyte).) “‘“Generally, the ruling on an application for
preliminary injunction rests in the sound discretion of the trial court. The exercise of that
discretion will not be disturbed on appeal absent a showing that it has been abused.
[Citations.]”’” (Ibid.; see also Code Civ. Proc., § 526, subd. (a).) Where the appellant
challenges the evidentiary foundation for an injunction and the evidence is disputed, we
review the record for substantial evidence—that is, we “interpret the facts in the light
most favorable to the prevailing party[,] indulge in all reasonable inferences in support of
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the trial court’s order,” and do not reweigh the evidence. (Hilb, Rogal & Hamilton Ins.
Services v. Robb (1995) 33 Cal.App.4th 1812, 1820 (Hilb, Rogal & Hamilton).) Where
the appellant’s challenge involves questions of law or the application of the law to
undisputed facts, our review of that challenge is de novo. (Westchester Secondary
Charter School v. Los Angeles Unified School Dist. (2015) 237 Cal.App.4th 1226, 1236.)
I. Probability of Prevailing on the Merits
“‘While it has been legally recognized that a former employee may use general
knowledge, skill, and experience acquired in his or her former employment in
competition with a former employer, the former employee may not use confidential
information or trade secrets in doing so.’” (Readylink Healthcare v. Cotton (2005) 126
Cal.App.4th 1006, 1017 (Readylink), quoting Morlife, Inc. v. Perry (1997) 56
Cal.App.4th 1514, 1519 (Morlife).) In line with this recognition, and as discussed below,
Destinations has established a probability of prevailing on its misappropriation of trade
secrets and unfair competition law claims.
California’s Uniform Trade Secrets Act (the Act) authorizes damages and
injunctive relief to enjoin the “[a]ctual or threatened misappropriation” of trade secrets.
(Civ. Code, §§ 3426.2, subd. (a), 3426.3; Readylink, supra, 126 Cal.App.4th at p. 1018.)
The Act defines a “trade secret” as “information” that (1) “[d]erives independent
economic value . . . from being not generally known to the public or to other persons who
can obtain economic value from its disclosure or use”; and (2) “[i]s the subject of efforts
that are reasonable under the circumstances to maintain its secrecy.” (Civ. Code,
§ 3426.1, subd. (d).) “Misappropriation” includes, among other things, the “use of a
trade secret of another without express or implied consent by a person who . . . [u]sed
improper means to acquire knowledge of the trade secret.” (Id., § 3426.1, subd. (b).)
In Readylink, the court upheld a preliminary injunction enjoining a former
employee of a nurse staffing firm from soliciting the firm’s employees and customers,
where there was “overwhelming” evidence that the employee intended to start his own
competing nurse staffing business and had solicited his former employees and nurses
using confidential internal lists of nurses, employees, and healthcare facility customers as
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well as salary and other “confidential and proprietary” information. (Readylink, supra,
126 Cal.App.4th at p. 1018.) Customer lists themselves can be trade secrets, at least
where the customers are not easily identifiable and the list took substantial time, effort,
and expense to develop. (The Retirement Group v. Galante (2009) 176 Cal.App.4th
1226, 1237-1238 (Galante); Courtesy Temporary Service, Inc. v. Camacho (1990) 222
Cal.App.3d 1278, 1286-1287 (Courtesy Temporary Service).) The information
defendants accessed from Destinations without its permission includes not only the lists
of its customers—teens with sensitive mental health and substance abuse issues—but also
its business plans, financial records, vendor and referral lists, and insurance information.
This information is proprietary, and is valuable because it is private; indeed, Destinations
took pains to keep it secret by requiring its employees to sign agreements highlighting its
confidentiality.
The unfair competition law authorizes damages and injunctive relief to prevent
“any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue
or misleading advertising.” (Bus. & Prof. Code, §§ 17200 & 17203.) “[T]he cases are
legion holding that a former employee’s use of confidential information obtained from
his former employer to compete with him and to solicit the business of his former
employer’s customers, is regarded as unfair competition.” (Courtesy Temporary Service,
supra, 222 Cal.App.3d at p. 1292; Readylink, supra, 126 Cal.App.4th at p. 1021 [same].)
It is unfair because “‘[t]rade and business secrets and confidential information are the
property of the employer and cannot be used by the employee for his own benefit.’”
(Morlife, supra, 56 Cal.App.4th at p. 1526; Lab. Code, § 2860 [“Everything which an
employee acquires by virtue of his employment, except the compensation which is due to
him from his employer, belongs to the employer, whether acquired lawfully or
unlawfully, or during or after the expiration of his term of employment”].) An
employee’s use that information is a form of “cheating” because the employee is making
“gratuitous use of [his employer’s] ‘sweat-of-the-brow.’” (Morlife, supra, 56
Cal.App.4th at p. 1520; accord, D’Sa v. Playhut (2000) 85 Cal.App.4th 927, 935
[“employers have the right to protect proprietary and property rights which are subject to
7
protection under the law of unfair competition”].) Because, as noted above, substantial
evidence supports the trial court’s finding that the information defendants took from
Destinations was confidential, defendants’ use of that information to compete with
Destinations constitutes an unfair business practice.
Defendants raise two objections to this analysis. First, they argue that not all of
the information taken from Destinations qualifies as a “trade secret” within the meaning
of the Act. However, this is of no moment because Destinations established that all of
the confidential and proprietary information at issue in this case falls within the broader
protections of the unfair competition law that independently supports the injunction.
Second, defendants contend that they may eventually prove at trial that some of the
information is not protected at all. “‘The ultimate determination of trade secret status’”
or application of the unfair competition law “‘is subject to proof presented at trial’”
(Readylink, supra, 126 Cal.App.4th at pp. 1017, quoting Whyte, supra, 101 Cal.App.4th
at p. 1453), but we are tasked here with assessing “whether the trial court abused its
discretion based on the record before it at the time of the ruling.” (Hilb, Rogal &
Hamilton, supra, 33 Cal.App.4th at p. 1820.) The trial court did not.
II. Balancing of the Interim Harms
In balancing the interim harms, we must look at the harm to each party should the
injunction be granted or denied. (Whyte, supra, 101 Cal.App.4th at pp. 1449-1450.) If
the injunction is granted, Destinations would be protected from misappropriation of its
trade secrets and from unfair business practices arising from defendants’ use of its
confidential and proprietary information. Defendants would not be allowed to use
Destinations’ trade secrets or proprietary information or initiate contact with
Destinations’ patients and employees, but would otherwise be permitted to operate their
competing business. If the injunction is denied, defendants would be allowed to use
Destinations’ trade secrets and proprietary information—including its business plan, its
financial records, its marketing materials, its insurance information as well as its patient,
employee, and vendor lists—to compete with Destinations and to solicit its patients,
8
employees, and vendors. However, Destinations would be unprotected from this
conduct, which would substantially impair—if not destroy—Destinations’ operations.
In light of these considerations, the trial court did not abuse its discretion in
concluding that the interim harm to defendants from granting the injunction (namely,
modest limitations on how it operates its business) outweighed the interim harm to
Destinations from denial of the injunction (namely, the potentially irremediable loss of its
patients, employees, and vendors due to defendants’ use of its own trade secrets and
proprietary information). Indeed, defendants do not contest this balancing on appeal.
III. Defendants’ Challenges
Separate and apart from whether Destinations is likely to prevail on the merits of
its claims and whether the balance of interim harms favors Destinations, defendants level
three attacks at the preliminary injunction itself. They assert that all or part of the
injunction is overbroad under Business and Professions Code section 16600, is
unconstitutional, or is moot. We consider each argument in turn.
A. Section 16600
Business and Professions Code section 16600 provides that “every contract by
which anyone is restrained from engaging in a lawful profession, trade, or business of any
kind is to that extent void.” (Bus. & Prof. Code, § 16600.) This absolute bar on
contractual restrictions repudiated the earlier, common law rule that allowed
“reasonabl[e]” “restraints on the practice of a profession, business or trade.” (Edwards v.
Arthur Andersen LLP (2008) 44 Cal.4th 937, 943 (Edwards); Galante, supra, 176
Cal.App.4th at pp. 1233-1234.) Unless a contractual restraint falls into one of section
16600’s three statutory exceptions (in sections 16601, 16602, or 16602.5), it is void.
(Dowell v. Biosense Webster, Inc. (2009) 179 Cal.App.4th 564, 576 (Dowell) [noting how
California does not follow the Ninth Circuit’s exception for “narrow-restraints” on
practicing a profession].)
Defendants seem to make two arguments based on section 16600.
First, defendants assert that section 16600 categorically precludes issuance of an
injunction whenever that injunction would in any sense interfere with a former
9
employee’s lawful profession, trade, or business. We disagree. As an initial matter, this
argument is unsupported by the language of section 16600, which applies to restraints
imposed by “contract”—not all restraints. (Bus. & Prof. Code, § 16600.) Although
Destinations in this case alleged a cause of action based on breach of the confidentiality
and nonsolicitation agreement with Baron and Ward, the trial court’s injunction did not
rest on that cause of action; consequently, there is some question as to whether section
16600 applies at all in this case.
However, even where an injunction is grounded in contract, courts have noted the
“tension” between section 16600’s bar on contractual restraints on the one hand, and the
cases allowing for injunctions to protect trade secrets and to guard against unfair
competition on the other hand (Galante, supra, 176 Cal.App.4th at p. 1233), but have
generally resolved that tension by allowing the injunction to the extent necessary to
protect the employer’s trade secrets and proprietary information. (Muggill v. Reuben H.
Donnelley Corp. (1965) 62 Cal.2d 239, 242 [allowing injunctions that “are necessary to
protect the employer’s trade secrets”]; Wanke, Industrial, Commercial, Residential, Inc.
v. Keck (2012) 209 Cal.App.4th 1151, 1174; Readylink, supra, 126 Cal.App.4th at
p. 1022; Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1429; Fowler v. Varian
Assocs. (1987) 196 Cal.App.3d 34, 44 [“agreements designed to protect an employer’s
proprietary information do not violate section 16600”]; Robert L. Cloud & Assocs. v.
Mikesell (1999) 69 Cal.App.4th 1141, 1150; cf. Dowell, supra, 179 Cal.App.4th at p. 577
[expressing doubt as to whether injunction to protect trade secrets survives section 16600
where there was no proof of misappropriation].) That is because “section 16600 bars a
court from specifically enforcing a contractual clause purporting to ban a former
employee . . ., but a court may enjoin tortious conduct (as violative of either the Uniform
Trade Secrets Act . . . and/or the unfair competition law) by banning the former employee
from using trade secret information . . . to otherwise unfairly compete with the former
employer.” (Galante, at p. 1238.)
Drawing this particular distinction makes sense. Defendants’ expansive reading of
section 16600 would partially negate Civil Code section 3426.2 and Business and
10
Professions Code section 17203 that expressly provide for injunctive relief, and such a
result flies in the face of the canons of statutory construction dictating that we must if
possible harmonize and give effect to each provision. (Even Zohar Constr. &
Remodeling, Inc. v. Bellaire Townhouses, LLC (2015) 61 Cal.4th 830, 838.) Defendants’
reading would also mean that former employees would be able to exploit their former
employer’s trade secrets and confidential information without restraint, subject only to a
later suit for damages after the fact. But a damages remedy will often come too late to
protect those rights or to protect the employer. Trade secrets and proprietary information
are valuable because they are confidential; once exploited by the former employee, a
damages remedy is of little use to a defunct employer. In sum, section 16600 does not
erect a categorical bar to injunctive relief.
Second, defendants contend that the preliminary injunction in this case sweeps
more broadly than necessary to guard against the misappropriation of Destinations’ trade
secrets or unfair competitive conduct. We conclude that the first four provisions of the
preliminary injunction are aimed specifically at protecting Destinations from defendants’
tortious conduct because they (1) enjoin the misappropriation of its trade secrets or
confidential information, (2) enjoin the use of its confidential and proprietary
information, (3) require the return of its confidential and proprietary information, and
(4) enjoin the deletion or alteration of electronic evidence (where, in this case, the
confidentiality and proprietary information has been stored).
The last two provisions of the injunction—the ones enjoining defendants from
“initiating contact” with Destinations’ employees and its “current or former patients”—
sweep more broadly than necessary to protect Destinations’ trade secrets and proprietary
information. To be sure, defendants might use Destinations’ trade secrets and proprietary
information to solicit its patients and employees to migrate over to Evolve; to that extent,
the nonsolicitation provisions are valid. (See Readylink, supra, 126 Cal.App.4th at
pp. 1019-1022; Wanke, supra, 209 Cal.App.4th at p. 1174 [“a former employee may be
barred from soliciting existing customers . . . if the employee is utilizing trade secret
information to solicit those customers”]; Galante, supra, 176 Cal.App.4th at p. 1237
11
[same].) But the provisions here are not limited to solicitations based upon use of
Destinations’ trade secrets or proprietary sections; instead, they reach the initiation of any
contact. Indeed, as written, they ostensibly prevent Baron or Ward from asking a former
colleague to lunch. Where a provision sweeps more broadly than necessary to prevent
tortious conduct and where the tortious conduct is protected elsewhere by the injunction,
section 16600’s prohibitions take precedence and an injunction is to that extent void.
(See Galante, supra, 176 Cal.App.4th at pp. 1239-1241 [invalidating injunction that
enjoined solicitation of prior customers that was not aimed at protecting trade secrets];
Dowell, supra, 179 Cal.App.4th at p. 575 [invalidating “broadly worded” noncompete
and nonsolicitation clauses]; see generally Huntingdon Life Sciences, Inc. v. Stop
Huntingdon Animal Cruelty USA, Inc. (2005) 129 Cal.App.4th 1228, 1266, 1268
[injunctions may not be broader than necessary].) We therefore vacate these two
provisions, and remand to the trial court to ascertain whether they are necessary in light
of the general prohibition against use of Destinations’ trade secrets and proprietary
information and, if so, for appropriate tailoring.
B. Constitutional Challenges
Defendants next raise two constitutional challenges to the preliminary injunction.
First, they argue that its terms are constitutionally vague. An injunction is
sufficiently clear (and not vague) if its terms are “plain enough that a person of common
intelligence can understand them.” (People v. Custom Craft Carpets, Inc. (1984) 159
Cal.App.3d 676, 681 (Custom Craft Carpets); Pitchess v. Superior Court (1969) 2
Cal.App.3d 644, 651.) Defendants argue that Destinations’ confidentiality and
nonsolicitation agreement defines “confidential information” so broadly as to leave it
without meaning and, worse yet, places the burden on the employee to establish that
information is not “confidential information.” As noted above, however, the preliminary
injunction does not rest on Destinations’ claim that the agreement was breached and the
injunction’s language is not tied to the agreement; defendants’ criticisms of the
agreement are accordingly irrelevant. Defendants further assert that the injunction does
not spell out specifically which information and documents are to be considered “trade
12
secrets” and “confidential and proprietary information.” But given that defendants
deleted (or tried to delete) much of that information and have also refused to return
electronic media ostensibly containing such information, they are not in a position to
complain that the trial court did not specify what that information is. In light of these
considerations, as well as the general rule that injunctions need not be drawn with
“microscopic precision” and are sufficiently clear “if it is reasonably possible to
determine whether a particular act is included within [their] grasp” (Custom Craft
Carpets, at p. 681), we reject defendants’ vagueness challenge.
Second, defendants argue that the preliminary injunction violates the First
Amendment because it is constitutes an impermissible “prior restraint” and is overbroad.
Although “prior restraints on speech . . . are the most serious and least tolerable
infringement on First Amendment rights” (Nebraska Press Assn. v. Stuart (1976) 427
U.S. 539, 559), an injunction that is aimed at protecting private property rights does not
constitute a “prior restraint.” (DVD Copy Control Assn., Inc. v. Bunner (2003) 31 Cal.4th
864, 887.) As noted above, we agree with defendants that the preliminary injunction is
overbroad to the extent that its provisions barring the initiation of contact with
Destinations’ patients and employees sweep more broadly than necessary to protect
against the misappropriation of trade secrets and unfair competition.
C. Mootness
Defendants also argue that the preliminary injunction’s fourth provision enjoining
them from “altering or destroying any electronic evidence” is moot given that their
devices have already been seized. But the record contains evidence that Baron and Ward
gave their attorney’s computer consultant thumb drives and that Ward erased his personal
hard drive, and this provides ample grounds for enjoining further deletions. Defendants’
related argument that this provision is vague is also without merit because people of
ordinary intelligence would understand the provision to preclude them from wiping
information from any of the electronic devices they use for work or for personal reasons
(given that Baron and Ward have deleted information from such devices in the past).
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DISPOSITION
We vacate the preliminary injunction’s fifth and sixth provisions enjoining
defendants from initiating contact with Destinations’ patients and employees, and remand
for the trial court to consider whether to tailor or delete these provisions. We otherwise
affirm. Parties to bear their own costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.
____________________, J.
HOFFSTADT
We concur:
_____________________, Acting P. J.
ASHMANN-GERST
_____________________, J.
CHAVEZ
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