Pro-Business, Pro-Inventor, Pro-Both or Pro-Nobody?

January 2006

Demystifying HR 2795:  The Patent Act of 2005

The lines have been drawn in the sand regarding the Patent Reform Act of 2005.[1]   Most recently, testimony was given[2]before the Subcommittee on Courts, the Internet, and Intellectual Property representing widely divergent interests including, among others, the software industry, pharmaceutical companies, biotech start-ups, and independent inventors[3].  Nearly all of the provisions of the Act have various interest groups foaming at the mouth to get in their two cents worth as to why the proposed legislation will either save or debilitate the U.S. Patent System (or at least save or debilitate their agenda).  But while some are looking at the proposed legislation as a battle between Big Business and the Individual Inventor, there is another possible view.  By and large the provisions are directed toward three issues existing in patent law today:  1) patent quality; 2) international harmonization; and 3) unwarranted or abusive patent litigation.[4]   Some of the provisions benefit patent holders while others benefit those defending themselves from patent infringement lawsuits.

This series will include postings regarding the various proposals in the Patent Act of 2005 including the 1) First-Inventor-to-File; 2) Assignee Filing; 3) Best Mode Requirement Repeal & Publication of Applications after 18 Months; 4) Duty of Candor in Front of the USPTO; 5) Willful Infringement; 6) Repeal of §271(f) for Software; 7) Apportionment of Damages for Infringement in the Case of a Combination; 8) Injunctions; 9) Continuation Applications; 10) Inter Partes Reexamination; 11) Prior User Rights; 12) Post-Grant Opposition Proceeding in the USPTO; 13) Submissions by Third Parties; and 14) Venue.

Since the Patent Act of 2005 was “not [a] front burner issue” [5] as the first session of the 109th Congress came to an end this fall, there is plenty of time to contact your representatives and let them know what you think of these provisions.

First-Inventor-to-File

The United States is currently a first-to-invent system but this legislation would change it to a first-to-file system.   This proposal serves Senator Orrin Hatch’s objective of international harmonization.  If passed, the legislation would align the United States with the rest of the patent world by granting a patent to the first person to seal an application in an Express Mail envelope and have it stamped by a U.S. postal worker. 

The current system allows a later filer to prove to the USPTO that they actually invented their claimed subject matter before the earlier filer.   If they succeed, the later filer may receive the patent grant. 

This change has those representing the independent inventors howling that this is clearly a pro-business stab into the heart and soul of United States patent law.  No longer will the solitary inventor, toiling away in his garage lab by candlelight receive the recognition he so richly deserves!  They fear that well-heeled businesses will too easily nab patent rights away from the true inventor.[6]   Their fears have served as a rallying point to amass support to defeat similar proposals in the past.

This rhetoric clouds the issue but there is an easy solution to their fears:  the provisional patent application.  For a nominal fee, this trick buys an inventor a place in line and an extra year to fully develop their patent application.  No claims are required at this point – only a written, enabling description of the invention and the best mode known of practicing the invention (as of the provisional filing).[7] 

Many inventors delay filing their patent applications (both independent inventors and those who work for corporations) because of the misconception that the USPTO requires a perfected, working embodiment before they can file for a patent (provisional or non-provisional).   Not so!  It may require years to make a marketable product out of an invention.  If you can describe what your invention is, how someone else can create it, and the best way known of practicing it (even if you have never actually created the final product), then a valid provisional patent application may be submitted.  As inventors make further developments, additional provisional applications may be filed (up to the one year time limit). 

The proposed legislation is not really against the independent inventor.[8]   Mostly, it is aimed at encouraging early filing of patent applications (which merely comports with the spirit of United States patent law to encourage early disclosure in exchange for a short-term monopoly).  As far as the United States is concerned, it gives a nod to the rest of the world that the United States doesn’t always insist on things being done their way.

Assignee Filing

Currently, a patent application can only be filed in the United States in the name of the inventors.   The Act would amend the law to allow the assignee of the invention to file as well.  This proposal, one of the few non-controversial provisions of the Act, is clearly pro-business:  Nobody seems to dispute the legality of filing a patent application in the corporation’s name rather than the inventors’ names.  As far as it goes, this will reduce the time spent chasing down signatures from the various inventors.  It will also reduce those pesky Missing Parts notices and the penalty fees associated therewith. 

Best Mode Repeal & Publication of Applications after Eighteen (18) Months

Currently, a patent application requires a tangled WEB (Written description, Enablement, and Best mode).  It is this disclosure of the invention which is the quid pro quo for the limited exclusivity provided by the patent.[9] 

This pro-patentee proposal seeks to remove the best mode requirement.  Proponents of this change state that this will have the effect of eliminating a subjective element in patent litigation, thereby reducing litigation costs, and increasing the predictability of litigation.  Others argue that this will allow patent holders to maintain trade secrets in addition to obtaining patent protection.    The proposal is also directed toward greater international harmonization since few other countries require this type of disclosure.

Interestingly enough, the same groups against this change are also arguing against the publication of all patent applications after eighteen (18) months. But, when taken together, both of these provisions actually complement each other.   Yes, one loses the possibility of trade secret protection after eighteen (18) months but they retain the ability to protect some trade secrets by not having to disclose their best mode anymore.  Furthermore, publication of all patent applications will increase the availability of prior art to allow potential patent applicants more data from which to determine whether their current project may or may not be patentable.

Duty of Candor in Front of the USPTO

The Code of Federal Regulations mandates that a patent is affected with a public interest and that this interest is best served when the USPTO is aware of and evaluates the teachings of all information material to patentability. Therefore, each individual associated with the filing and prosecution of a patent application (including, but not limited to, the inventors and their attorneys) has a duty to disclose to the USPTO all information material to patentability.  The penalty for failing to disclose a material reference is severe.  No patent will be granted on an application where the duty of disclosure was violated through bad faith or intentional misconduct.  Your attorney may also be subject to disciplinary proceedings.[10]

The proposed legislation is pro-patentee.   Unless the withheld reference would result in a patent being unenforceable, then the patent remains valid.  This should lessen the fear which results in patent prosecutors preparing kitchen sink disclosures which include lists of every patent they have ever laid eyes upon that might be deemed as possibly relevant to the application at hand.  The whole process supports the legal fiction that the Patent Examiner has reviewed all the references cited in the disclosure and determined whether or not they affect patentability.  This presumption then carries a higher burden to overturn during litigation.  But who really thinks that the Patent Examiners actually have time to review all those references and still get home before it is time to collect Social Security?  Tailoring this duty will allow prosecutors the freedom to truly list those references that are actually relevant to the patent thus resulting in better communication between them and the USPTO and, hopefully, better examinations.  If there is a downside to this proposal, it is certainly not apparent.

Willful Infringement

The phrase “treble damages” strikes terror into the heart of all non-patentees.  It further promotes a balancing act between maintaining an ostrich mentality and risking that curiosity will kill the cat.  An individual who is about to invest in a new technology must choose between allocating resources to determine what is out there or putting on their darkest sunglasses for fear that they may come across a patent that may potentially cover what they are doing.[11] 

The changes proposed here[12] seek to make sure that the infringer willfully infringed rather than fictionally assuming that they infringed because they (or more likely their attorneys) may have glanced at the patent at some point.  The proposal would codify that a court may find an infringer guilty of willful infringement if the patentee presents clear and convincing evidence[13] that

A good faith belief that the patent was invalid or unenforceable, based upon advice from a licensed patent attorney, may serve as a defense to willful infringement.

These proposed changes are good for the progress of the arts and sciences because they allow individuals to make a reasonable assessment a technology area and then make an educated decision about whether or not to proceed without being crippled with fear from the specter of increased damages.  

Repeal of §271(f)[14]for Software

Oh boy, is this a complicated one!   Here’s the deal.  United States Patent law allows the patentee to exclude others from making, using, selling, and exporting the patented invention.  But, once upon a time, some clever people figured out that they could export the pieces that make up the patented invention (or a major component thereof) without running afoul of the patent holder’s exclusion rights (since exporting components was not part of the exclusionary rights granted by the law).  They would assemble the patented invention abroad, outside of the jurisdiction of U.S. law, and then sell it abroad. 

So, around 1984, Congress put a stop to this kind of thing by allowing patent holders to tag those clever people as infringers.   The patent holders could then get damages on both the domestic and foreign sales of the finished product. 

There was some doubt as to whether this would apply to software but the Court of Appeals for the Federal Circuit recently held[15] that these damages are not limited to physical machines.  This proposal seeks to overturn that ruling by requiring that 35 U.S.C. 271(f) only apply to tangible items.

This is pro-software developers who partially develop in the United States and then sell abroad.   If the statute remains unchanged, it creates a potent argument for moving all development of software outside of the United States.

Apportionment of Damages for Infringement in the Case of a Combination

If 35 U.S.C. 271(f) remains unchanged, there may be some relief offered to defendants by the proposal that damages should be assessed according to the inventive contribution of the patent rather than the product taken as a whole.  In determining a reasonable royalty, the court shall consider the portion of the realizable profit or value that should be credited to the inventive contributions arising from the claimed invention as distinguished from contributions arising from features, manufacturing processes or improvements added by the infringer and from the business risks the infringer undertook in commercialization.

Emery Simon, giving testimony for the Business Software Alliance,[16] objects to codifying a modified version of factor #13 of the Georgia Pacific case.[17]   Mr. Simon is concerned that “the damage claim often seeks some portion of the product as a whole, … such as a computer, rather than being limited to only the value of the infringing feature.  This often leads to unduly inflated verdicts or settlement demands, and is unworkable when thousands of patents can apply to a single product.” [18]

But Philip S. Johnson, on behalf of the Pharmaceutical Research and Manufacturers of America (PhRMA),[19]offers the counterpoint that this kind of analysis would undermine the reasonable royalty determination because “A patented invention should not be dissected into its subparts … and then evaluated piecemeal … the true value of the invention will likely be lost.” 

The problem is that a reasonable royalty is a difficult thing to determine no matter how many factors you throw into the framework. Even if an inventive contribution is small, it may be the lynchpin which sells the entire product.   On the other hand, the inventive contribution may be the thinnest differentiation against the known prior art. 

The proposed legislation, however, overlooks some additional “wiggle” factors, cited in Georgia-Pacific, to consider in a damages assessment, including the opinion testimony of qualified experts and the nature of the patented invention, its character in the commercial embodiment owned and produced by the licensor, and the benefits to those who used it.    It may be better to rely on these as the means for assessing the inventive contribution rather than codifying a rigid formula.

Injunctions

And we’re back to the original law in this match of patent reform ping-pong.[20]   The pro-defendant proposal, which was removed in the latest round of amendments, would have required a court to consider the fairness of an injunction in light of all the facts and the relevant interest of the parties by codifying that “an injunction may be stayed pending appeal upon … showing that the stay would not result in irreparable harm to the patent owner.”  It sought to overturn a recent ruling by the Court of Appeals for the Federal Circuit (CAFC).[21]  

In that case, MercExchange challenged the district court’s refusal to enter an injunction against the defendant.  Courts may decline to enter an injunction when such a refusal may serve the public interest, such as the need to use an invention to protect the public health.  But the CAFC did not feel that sufficient public interest was served by the “growing concern over the issuance of business method patents”[22]   Injunctions are further not reserved for patentees who intend to practice their patents, as opposed to those who choose to license (not so affectionately called patent trolls). The statutory right to exclude is equally available to both groups.  The CAFC ruled that courts should issue permanent injunctions against patent infringement absent exceptional circumstances.

Stay tuned, the Supreme Court may beat the legislature to a decision on this issue as they just granted cert for this case.[23]

Continuation Applications

Ah, the ghost of Jerome Lemelson lives and continues to rattle his chains.[24]   Lemelson was a prolific inventor and obtained more than 500 patents in his lifetime.  He is famous for the patents covering the use of bar code readers.  In patent circles, however, he is even more famous for his method of submarine patenting.  Lemelson kept patent applications alive in the U.S. Patent and Trademark Office for years, through a multitude of continuation applications, and then secured patent grants and attacked infringers for technology disclosed within the applications after widespread commercial use of the technologieshad evolved. 

Congress addressed this practice when they changed the patent term from seventeen (17) years from the date of issue to twenty (20) years from the date of filing.[25]  But in rapidly moving industries, particularly software, even twenty years has generated outcry that the monopoly granted by law is overly stifling to innovation.  So the proposed legislation allows the USPTO to issue regulations limiting continuation applications to address supposed continuing abuses.  This is a dangerous idea that seems to be mainly directed at reducing workload in the patent office.[26]   Intervening rights allow competitors to practice material that is claimed in a reissued or reexamined patent application.  This protects investment and limits the effect of submarine patents even within the twenty year patent term.[27]   Otherwise, inventors should be able to pursue patents on anything in an active application that meets the requirements of patentability.

Inter Partes Reexamination

The American Inventor’s Protection Act[28]introduced the concept of inter partes reexamination prospectively(post-1999)[29].  This proposal would expand the availability of this procedure to all patents.  It favors both the patentee and the non-patentee in different respects.

This form of reexamination is intended to be an alternative/improvement to the pre-existing ex parte reexamination. Inter partes reexamination may be requested by any third party and they are permitted to present prior art (comprising prior patents and printed publications) for review by a patent examiner.  The requestor may also file comments on the patentee’s response to the prior art presented. 

BUT, if the requestor fails, they have sealed their own coffin.  The requestor is estopped from challenging any fact, in court, that was established during the inter partes reexamination procedure, unless that fact is later found to be erroneous based on information that was unavailable at the time of the inter partes reexamination.

Inter partes reexamination may lessen the volume of patent litigation but it is unlikely that this method will be utilized by potential defendants unless they have an airtight argument.    When such arguments exist, however, this proposal offers a significantly less expensive alternative to infringement.

Prior User Rights

The proposed legislation expands the prior user rights defense[30]by striking the requirement that the infringement involve a “useful end product”.   This change would have the effect of extending the defense to methods of doing business. It also enhances the safe harbor for non-patentees in that they only have to beat the filing date of the patent application, through commercial use, rather than that date plus one year to qualify for the defense.  The benefit of this provision is clearly directed toward the non-patentee but seems reasonable in our ultra-competitive country as it goes to the balance between trade secret protection versus patent protection.

Post Grant Opposition Proceeding in the USPTO

On the third Tuesday of the month, if the moon is full, you may file an opposition to a patent grant.   The actual provision is not quite so convoluted, thanks to a recent amendment, but there are definitely some timing issues that must be given their due!  The Act proposes that a person may request that the grant or reissue of a patent be reconsidered by the USPTO by identifying the claims that are considered unpatentable and citing support thereof.  The request must be made within 9 months of the grant of patent unless the patentee agrees otherwise (not too likely!). [31]

Aside from re-examination and interference proceedings, a third party’s ability, to challenge a patent grant, without resorting to litigation, is limited. The proposed procedure would allow the use of depositions and discovery to fully explore the validity of an issued patent;[32] but, the failure of the non-patentee to prove their case carries estoppel issues similar to those under reexamination.[33]  Basically, the requestor is trading off his right to a jury trial on the factual issues of the case. 

The Professional Inventor’s Alliance has expressed concern that this procedure might be misused to shift additional costs onto the patentee.  They have also criticized the provision for its standard of proof,[34] ability to hide the real party in interest,[35]and the availability of the procedure to accused infringers after a patent lawsuit has been filed.

While their concerns are valid, it is clear that some alternative to the extreme costs of litigation is in order.  The average cost of patent litigation ranges between $500,000 and $4,000,000 per party.[36] In addition, if “it is only possible to test a patent’s validity through litigation if the patentee brings an infringement action against a competitor or provides the competitor with standing to bring a declaratory judgment action based on threats by the patentee …. a competitor cannot challenge a patent in litigation before the competitor incurs the costs and risks of developing and marketing a product.”[37]   This means of limiting the inquiry to just the validity of the patent offers a compromise that will likely benefit everyone involved. 

Submissions by Third Parties

35 U.S.C. §122(c) currently prohibits any “protest or other form of pre-issuance opposition” after publication without consent of the applicant although MPEP 1134.01 provides for a limited two-month window, following publication of a pending application, under which submissions may be made without comment.   This proposal expands the window for submitting prior art against pending applications to six months after publication.  It would also allow the third party to make arguments regarding such prior art in relation to the pending application.  Yes, it does put a burden on non-patentees to keep an eye on their competitors’ patent doings but, if used, gives them a fairly cheap way to knock out rival patents and strengthen the patent system.  It also benefits the patentee because they gain early knowledge of (and an opportunity to argue against) probative prior art.  If the patent issues in spite of the submission, the patent holder has the security of knowing they have already survived a challenge to their patent from a competitor.

Venue

The original wording for this section raised a hue and cry because it clearly shifted the balance of power toward the defendant in litigation.  “It would only allow a lawsuit to commence in the district where the defendant resides or is located.  Resource limited companies may be forced to file lawsuits far outside of their normal jurisdiction where they may find it difficult/expensive to assert their patent rights.” [38] 

The amendment provides a facially more even-handed approach to venue.   It directs the court to grant a motion for transfer to a more appropriate venue where a party to the action has substantial evidence or witnesses if the action was not brought in a district in which the patentee resides or maintains its principal place of business and, at the time the action was brought, neither the patentee nor the infringer had substantial evidence or witnesses in that judicial district. 

Did you actually read all of that?   The upshot is that most of the evidence regarding infringement will probably be in the judicial district associated with the defendant so the amendment is simply a more loquacious way of assigning venue to the defendant.  Lucky for the patentee, there is always the Court of Appeals for the Federal Circuit. 



[1]Patent Reform Act of 2005 (HR 2795), introduced by Lamar Smith (R) (hereinafter, the Act).

[2]Legislative Hearing on "The Amendment in the Nature of a Substitute to H.R. 2795, the 'Patent Act of 2005' " (September 15, 2005) (hereinafter, the September Hearing).

[3]Among others testifying at the September Hearing were the Business Software Alliance, Pharmaceutical Research and Manufacturers of America (PhRMA), Biotechnology Industry Organization (BIO), and the Professional Inventors Alliance.

[4]Senator Orrin Hatch: Remarks to Generic Pharmaceutical Association (Sept. 20, 2005).

[5]Senator Orrin Hatch: Remarks to Generic Pharmaceutical Association (Sept. 20, 2005).

[6]35 U.S.C. 102(f) actually prevents the awarding of a patent to a quick filer that did not invent the subject matter so don’t throw away those lab notebooks yet!

[7]35 U.S.C. Section 112.

[8] Besides, only 15-20% of the claims that an earlier inventor, who did not file their patent application first, should receive a patent succeed.

[9] The best mode requirement was codified around 1870 so it, actually, was not part of the original quid pro quo designed by the Founding Fathers.

[10] Always a terrible thing from the attorney’s point of view!

[11]Please note, that courts/juries decide whether or not a patent actually covers a given technology.   A well-drafted freedom-to-practice opinion from a licensed patent attorney may protect one from a willful infringement claim but it will not necessarily protect one from a finding of infringement even when there is a good argument to the contrary.

[12]One area that is still being considered is whether a court or a jury will be responsible for the willfulness determination.  

[13] This means that the fact-finder must be persuaded by the evidence that it is highly probable that the claim or affirmative defense is true. The “clear and convincing” evidence standard is a heavier burden of proof than the “preponderance of the evidence” standard but less than “beyond a reasonable doubt”.

[14]271(f) (1) Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

(2) Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial non-infringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

[15]Eolas Techs. v. Microsoft Corp., 399 F.3d 1325, 1339 (Fed. Cir. 2005).

[16]Before the United States House of Representatives Committee on the Judiciary Subcommittee on Courts, the Internet, and Intellectual Property Hearing on:   An Amendment in the Nature of a Substitute to H.R. 2795 the “Patent Reform Act of 2005” (September 15, 2005).

[17]The case actually directs the court to look at the contribution from the “claimed invention” instead of the “inventive contribution.”   Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp 1116, 1120 (SDNY 1970), modified and aff’d sub nom., Georgia-Pacific Corp. v. United States Plywood-Champion Papers, 446 F2d 295 (2d Cir. 1971), cert. denied, 404 US 870 (1971). 

[18]Before the United States House of Representatives Committee on the Judiciary Subcommittee on Courts, the Internet, and Intellectual Property Hearing on:   An Amendment in the Nature of a Substitute to H.R. 2795 the “Patent Reform Act of 2005” (September 15, 2005).

[19]Before the United States House of Representatives Committee on the Judiciary Subcommittee on Courts, the Internet, and Intellectual Property Hearing on:   An Amendment in the Nature of a Substitute to H.R. 2795 the “Patent Reform Act of 2005” (September 15, 2005).

[20] 35 U.S.C. § 283 mandates that the courts may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent on such terms as the court deems reasonable.

[21]MercExchange, L.L.C. v. eBay, Inc., et al., (CAFC - Docket No.03-1600, March 16, 2005).

[22]Neither was the CAFC persuaded by the District Court’s fear that an injunction would result in continuing disputes over whether the defendants’ subsequent actions would also violate MercExchange’s rights (that is, create more work for them). 

[23]MercExchange, L.L.C. v. eBay, Inc., et al.,   (CAFC - Docket No.03-1600, March 16, 2005), cert granted, (No. 05-130), November 28, 2005.

[24]Even though his patents were adjudged invalid in Symbol Technologies Inc. et al. v. Lemelson Medical, Education & Research Foundation LP et al., No. 04-1451, 2005 WL 2173572 (Fed. Cir. Sept. 9, 2005).

[25]These changes arise from the GATT Uruguay Round implementing legislation (P.L. 103-465).   The provisions relating to patent term went into effect on June 8, 1995.

[26] See also, the proposed “Changes to Practice for the Examination of Claims in Patent Applications” (DEPARTMENT OF COMMERCE Patent and Trademark Office, 37 CFR Part 1 [Docket No.: 2005–P–067] RIN 0651–AB94 - http://www.uspto.gov/web/offices/com/sol/notices/71fr61.pdf) which were filed on December 30, 2005. 

[27]35 U.S.C. 252.

[28]The American Inventors Protection Act was enacted November 29, 1999, as Public Law 106-113 (hereinafter, the American Inventors Protection Act).

[29]35 U.S.C. 314.

[30]35 U.S.C. 273(b) currently provides that it shall be a defense to infringement if the accused, acting in good faith, had actually reduced the subject matter of the patent being asserted to practice at least 1 year before the effective filing date of that patent AND commercially used the subject matter of the patent before the effective filing date of the patent - the sale or other disposition of a useful end product produced by a patented method qualifies as a commercial use.

[31]See, Section 323 of the Act.     The time limit parallels European patent practice and goes toward giving the patent holder some certainty, after the proscribed period, that their patent is no longer in danger of this type of challenge.

[32]See, Section 328 of the Act.

[33]See, Section 336 of the Act.

[34]See, Section 332 of the Act which sets the standard at “preponderance of the evidence” rather than the “clear and convincing” standard offered in court which gives the patent holder an edge on the finding of validity.

[35]See, Section 322(a-b) of the Act:   [T]he opposition shall proceed in the name of the real party in interest. [I]f requested by the opposer, the identity of a real party in interest shall be kept separate from the file of the opposition and made available only to Government agencies upon written request, or to any person upon a showing of good cause.

[36]Statement of Michael K. Kirk, Executive Director American Intellectual Property Law Association, before the Subcommittee on Courts, the Internet, and Intellectual Property Committee of the Judiciary U.S. House of Representatives on the Patent Quality Improvement:  Post-Grant Opposition (June 24, 2004).

[37]Statement of Michael K. Kirk, Executive Director American Intellectual Property Law Association, before the Subcommittee on Courts, the Internet, and Intellectual Property Committee of the Judiciary U.S. House of Representatives on the Patent Quality Improvement:  Post-Grant Opposition (June 24, 2004).

[38]Robert B. Chess, on behalf of the Biotechnology Industry Organization, before the United States House of Representatives Committee on the Judiciary Subcommittee on Courts, the Internet, and Intellectual Property Hearing on:   An Amendment in the Nature of a Substitute to H.R. 2795 the “Patent Reform Act of 2005” (September 15, 2005).

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