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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