“Frankenstein” Veto Language Interpreted by Federal District Court

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A recent post on this blog noted that wine distributors were not covered by an expansion of the definition of “dealer” under 1999 amendments to the Wisconsin Fair Dealership Law (“WFDL”) due to “a creative partial veto from then-Gov. Thompson.”

That creative partial veto was front and center in a decision and order issued last week by the U.S. District Court for the Eastern District of Wisconsin, denying defendants’ motion to dismiss for failure to state a claim. The plaintiff, Winebow, Inc., had brought a declaratory judgment action seeking to affirm that it could terminate all wine distribution relationships with defendants Capitol-Husting Co., Inc., and L’eft Bank Wine Company Limited without violating the WFDL.

The crux of the defendants’ motion to dismiss was that the 1999 amendments to the WFDL should be interpreted to define wine distributors as “per se dealers” under the WFDL, subject only to limitations on small producers and sales lines constituting less than 5% of a distributor’s business. They contended that the statute covers distributors of “intoxicating liquor” as defined in section 125.02(8) of the Wisconsin Statutes, regardless of whether such distributors can meet the “community of interest” test ordinarily required for dealer status.  Defendants noted that the WFDL definition that provides per se dealer status to distributors of intoxicating liquor defines “wholesalers” with reference to section 125.02(21) of the Wisconsin Statutes, which definition does not exclude wine wholesalers.

The WFDL, however, defines “intoxicating liquor” as having “the meaning given in s. 125.02(8) minus wine.”  The words “minus wine” were inserted via Gov. Thompson’s use of what was dubbed a “Frankenstein veto,” with many other words in succeeding clauses of the legislation deleted by his veto pen, leaving only “minus” and “wine” in place. The District Court denied the motion to dismiss, finding that “[t]he statutory definition of “intoxicating liquor” is clear, and wine is expressly excluded.”

Other arguments in this case, however, may also prove to be instructive. The plaintiff’s complaint seemingly alleges that the “minus wine” language means that all wine distribution agreements are exempt from coverage under the WFDL – even if the parties’ relationship satisfies the community of interest test of section 135.02(3)(a).  The complaint states the defendants’ wholesale distribution of Winebow portfolio wines does not qualify for protection under the WFDL “as wine is expressly exempt from the WFDL.”  Plaintiff’s contention was not directly at issue in the defendants’ motion to dismiss, but presumably would be raised in a motion for summary judgment or for judgment on the pleadings.

Filed Under: Wine, Intoxicating liquor, Wisconsin Fair Dealership Law, WFDL, dealer termination, wholesaler, Distribution Agreement, distributor

Wine and Spirits Distributors Said To Be Seeking Legislative Protections

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The Wheeler Report reported on Thursday that five trade associations have raised concerns to state legislators about rumored proposed amendments to Wisconsin’s Fair Dealership Law that would make it easier for wine and spirits distributors to transfer brand distribution agreements to third parties.

One letter to legislators dated May 14, 2015 was jointly authored by the Wisconsin Restaurant Association, the Wisconsin Petroleum Marketers & Convenience Store Association and the Wisconsin Grocers Association,  all representing retail sellers.  Another letter, also dated May 14, 2015, came from the Distilled Spirits Council of the United States and the Wine Institute, who advocate for manufacturers.

The associations allege that at least one wine and spirits wholesaler has sought amendments to the WFDL similar to changes that were enacted by the Wisconsin Legislature in 1999, but were significantly limited by a partial veto by then-Gov. Tommy Thompson.  That partial veto eliminated a section that would have provided that a change in management, ownership or control of a wholesaler would not be “good cause” under the WFDL for a grantor to terminate, cancel, fail to renew or substantially change the competitive circumstances of a wholesaler, as long as the successor wholesaler met the grantor’s reasonable and material qualification standards in effect at the time of the change.

Other provisions of the 1999 legislation expressly defined “dealer” to include liquor wholesalers, without reference to the “community of interest” requirement for dealer status under the WFDL. The expanded definition of dealer provided exceptions from WFDL coverage where the manufacturer had never produced more than 200,000 gallons of liquor in a single year, or where the distributor’s net revenues from sales of all brands produced by that grantor was less than 5% of all liquor sold by the distributor. These provisions survived the partial veto.  The original legislation, however, would have similarly expanded the definition of dealer to cover wine distributors.  A creative partial veto from then-Gov. Thompson removed wine distributors from that protected class.

Filed Under: Wisconsin Fair Dealership Law, Intoxicating liquor, Wholesalers, Wine, Liquor, Community of Interest, good cause

When Does The Statute of Limitations Begin to Run on WFDL Claims?

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Although the Wisconsin Fair Dealership Law (“WFDL”) provides significant protections for franchisees and dealers against termination and non-renewal, the statute of limitations for filing WFDL claims is one year. That short limitations period can be a minefield for parties seeking relief under the WFDL.

For 30 years, the Wisconsin Supreme Court’s ruling in Les Moise, Inc., v. Rossignol Ski Co. has provided the principal precedent in evaluating when WFDL claims accrue for purposes of the one-year statute of limitations.  In Les Moise, the court held that a Chapter 135 claim accrued on the date that the dealer receives notice of an allegedly improper termination, instead of the actual date of termination.

A recent unreported decision of the Wisconsin Court of Appeals, Chili Implement Company v. CNH America, LLC, illustrates unresolved issues that remain in applying the Les Moise holding.  The CNH court held that “we disagree with CNH that Les Moise establishes that all causes of action under the Wisconsin Fair Dealership Law accrue when a dealer receives a termination notice.”

The facts of CNH:

  • CNH sent a notice to Chili Implement on March 1, 2010, stating that Chili Implement is in default of the parties’ agreement because it has failed to achieve a satisfactory market share and to stock sufficient inventory.  The notice also stated that to avoid termination, Chili needed to accomplish two things within one year of the notice date:  “to meet or exceed 90% of the Wisconsin state market share” and to stock sufficient inventory to achieve that market share.
  • After a year passed, CNH determined that Chili Implement has failed to meet the stated requirements and terminated Chili effective May 31, 2011
  • Chili sued CNH on January 19, 2012, alleging violations of the WFDL, among other violations.

CNH alleged that under Les Moise, CNH’s claims under the WFDL were barred by the one-year statute of limitations.  The notice was sent March 1, 2010; the lawsuit was filed almost two years later, on January 19, 2012.  Chili Implement asserted that its WFDL claim accrued as of the date of actual termination, on May 31, 2011.  The trial court had granted summary judgment in favor of Chili Implement on the statute of limitations question, finding that a material factual dispute existed as to whether the 2010 notice was actually a notice of termination.

The CNH court did not answer how a lawsuit such as Chili Implement’s should be treated.  The CNH court cited limiting language from Les Moise that what matters is whether, upon receipt of a notice, the dealer was “immediately capable of determining” all of its claims.  The court noted that Chili Implement had two potential claims:  one based on inadequate notice (which was capable of immediate enforcement upon receipt of the 2010 notice) and termination without good cause (which depended on subsequent acts or omissions of CNH).  But because CNH had not briefed how such claims should be handled, the CNH court declined to do so, and found that CNH has failed to show that it had a winning statute of limitations argument based on Les Moise.

So the issue remains:  when does the WFDL statute of limitations begin to accrue?

[Chili Implement Company v. CNH New Holland, LLC, 2014AP1496]

Filed Under: statute of limitations, Wisconsin Fair Dealership Law, notice to cure, 135.04, dealer, grantor, Franchisor, Franchisee, Chapter 135

Crowdfunding Comes To The Franchise World

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We’ve been curious to see whether crowdfunding would find the world of franchising.  Traditionally, the solicitation of investors through general advertising has been severely restricted under federal and state securities law; these limitations also apply to crowdfunding, or seeking capital contributions through online solicitation of the masses. The JOBS Act of 2012 sought to remove some of these restrictions, under the theory that both investors and businesses seeking capital could benefit from this new internet marketplace, as long as certain protections are in place.

Now Fund A Franchise, has begun to accept applications from prospective franchisees and invite investors to provide funding in a manner similar to that deployed by Kickstarter. It appears that Fund a Franchise is the first crowdfunding platform organized to cater to the franchising market.

Fund a Franchise requires that a prospective franchisee complete an application and be accepted into the program. The prospective franchisor must agree that it will consider a franchisee capitalized at least in part through the crowdfunding program.  The prospective franchisees pay a monthly fee to be listed on the site and have access to a “deal room”; investors may participate at no charge.  Investments may be made in the form of equity or debt.

Crowdfunding has the potential to match individuals who wish to open a franchised business, but lack the necessary capital investment to do so, with investors who might be willing to take a chance on a franchising opportunity.  But several questions and issues occur to us, including:

  • Will franchisors agree to participate?  Generally, franchisors generally want to limit the number of owners of a franchisee.  If the franchisee has too many owners, it may not be clear who has the right to make decisions on behalf of the franchisee.   Many franchisors may be reluctant to approve a franchisee that raised capital through contributions from numerous individuals.  A franchisor would be more likely to accept a franchisee that consists of one manager/entrepreneur providing primarily services to the start-up business and a single sophisticated investor whose principal contribution is capital.  The Fund a Franchise website suggests that several franchisors are willing to participate, but none are large systems.
  • Will a manager/entrepreneur and investor(s) who are brought together online be compatible?  Such arrangements generally succeed when there is a great deal of trust established among the parties; written contracts can only go so far.
  • At this time, only accredited investors (generally, individuals with over $1 million in assets or with income in excess of $200,000 in each of the last two years) can participate in crowdfunding on Fund a Franchise and similar platforms.   This places a significant constraint on the number of persons who are eligible to invest through the site.  The prohibition against participation by non-accredited investors will end when the SEC finalizes regulations permitting such investments, but these regulations are not likely to be in place before early 2016.
  • Using Fund a Franchise will not avoid legal fees; the site requires users to retain a securities lawyer (although the site will apparently provide referrals to such counsel upon request).

(Note:  This post is provided for information purposes only; we make no recommendation as to the advisability of utilizing Fund a Franchise or any other investment platform or investing in any business.  You should consult legal counsel and your financial advisor before entering any such arrangement)

Filed Under: Crowdfunding, franchise, Franchisee, Franchisor, Capitalizing franchise, Accredited Investor

Fore!  Governmental Entities May Need To Consider Applicability Of WFDL

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If ultimately upheld on appeal, the trial court’s initial holdings in a lawsuit filed by four golf professionals against the City of Madison, alleging a breach of the Wisconsin Fair Dealership Law by the City, have the potential to establish that the WFDL applies to governmental entities as well as private businesses.  To date, no reported case law has addressed the potential application of the WFDL to governmental entities.

Beginning in 1976, the City of Madison had contracted with golf professionals to administer municipal golf courses on the City’s behalf.  Under these agreements, the golf professionals were responsible for operating and maintaining the courses, paying for all employees, golf carts, golf ranges, golf-related goods, services, food and beverages and golf-related merchandise available for purchase at the courses.  In December, 2012, existing agreements between the City and the golf professionals terminated and were not renewed by the City.  Last year, the golf professionals sued the City, alleging that the City’s non-renewal of their agreements violated the WFDL.

In asserting that the WFDL does not apply to the City or its relationship with the golf professionals in its motion to dismiss, the City advanced two principal arguments:

  • A municipality is not a “person” with the definitions contained in Chapter 135.  “Person” is defined under sec. 135.02(6), Wis. Stats., as “natural person, partnership, joint venture, corporation or other entity.”  The City contended that the City is a “municipal corporation” and that “municipal corporation” is not included within the statutory definition of “person.”
  • The City did not grant the golf professionals the right to sell goods or services, the right to distribute goods or services, or the right to use a trade name, trademark, service mark, logotype, advertising or other commercial symbol of the City, as required under the definition of “dealership” under sec. 135.02(3)(a), Wis. Stats.

As to the first argument, the trial court held that “[m]unicipal corporations, such as the City of Madison, form a subset of “corporations.”  If that were not the case, the City would nonetheless fall within the definition of “person” under the WFDL as an “other entity”.”  The trial court disagreed with the City’s contention that case law would require that statutory provisions that are written in general terms, without expressing a clear intention that the statute apply to a governmental entity, should not be imposed on a governmental entity.  The trial court also cited sec. 135.025(1), Wis. Stats., which requires that the WFDL “shall be liberally construed and applied to promote its underlying remedial purposes and policies.” Similarly, the trial court found that the plaintiffs had alleged facts that, if proven to be true or further developed, could be sufficient to show that the City had granted the plaintiffs the right to sell the City’s goods or services or to use the City’s trademark or other symbols.  Thus, the trial court held, dismissal of the golf professionals’ lawsuit was not proper either on these grounds nor based on other arguments advanced by the City in its motion to dismiss.

Both the plaintiffs and defendant have motions for summary judgment pending with the trial court.  If the court does not grant summary judgment to either party, and the parties do not settle their dispute, the lawsuit is scheduled to proceed to a jury trial during the first week of August, 2015.

(Benson et al v. City of Madison, Dane County Circuit Court Case No. 14 CV 180)

Filed Under: WFDL, Municipal corporations, Community of Interest, Wisconsin Fair Dealership Law, Definition of

The Good, the Bad, the Uncertain:  Developments In Franchisor Liability

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          The legal debate over imposing vicarious liability of franchisors – or making franchisors liable for the acts of their franchisees and franchisees’ employees – has flared up this year, thanks in large part to a recent court decision and policy directives emanating from the Office of the General Counsel of the National Labor Relations Board.

          The franchise model assumes that franchisees merely license franchise trademarks, copyrights and other intellectual property from franchisors, and that the franchisee is not the agent of the franchisor.  While franchisors may insist that the franchisee follow quality control, marketing and product consistency standards that affect the franchisor’s trademarks, franchisors typically contractually disclaim any right to control day-to-day hiring, firing and supervision of employees.  But that does not prevent parties who assert claims against franchisees from also alleging that the franchisor should be liable as well, based on principles of agency.  The claimant alleges that the franchisee and its employees are agents of the franchisor, and thus the franchisor is liable as well.

          First, the good news for franchisors:  In late August, the California Supreme Court held that Domino’s Pizza LLC was not liable for the acts of a franchisee whose manager had allegedly harassed an employee.  The court’s decision was based largely on the terms of the franchise agreement between Domino’s and its franchisee.  The court did note, however, that a franchisor “will be liable if it has retained or assumed the right of general control over the relevant day-to-day operations at its franchised locations … and cannot escape liability in such case merely because it failed or declined to establish a policy with respect to that particular conduct.”

         Next, the bad news: in July, the Office of the General Counsel to the National Labor Relations Board announced that it would authorize complaints alleging that McDonald’s USA LLC is a “joint employer” of the employees of its franchisees.   The Office of the General Counsel found merit in charges that McDonald’s and its franchisees had violated the rights of employees “as a result of activities surrounding employee protests.”

          The NLRB release announcing the decision did not set forth the grounds as to why McDonald’s was deemed to be a joint employer, but the NLRB Office of the General Counsel has signaled, in another pending case, that it seeks to change the standard for determining when “joint employer” status is applicable.   Under the existing standard, which has been in place for 30 years, a finding of joint employer status is appropriate when two or more parties “share or codetermine those matters governing the essential terms and conditions of employment.” The International Franchise Association and other trade groups have filed a brief in the pending case, opposing the attempt by the NLRB Office of the General Counsel to re-define joint employer status so as to include situations where one party indirectly controls the other.

        While a revision to the definition of joint employer would affect many industries, it would have a massive impact on the franchise industry, whose business model is predicated in large part on the distinction between franchisor and franchisee.

Filed Under: Franchisor, Franchisee, Franchise Agreement, Vicarious Liability, NLRB, joint employer

Preemption principles applied to dismiss Wisconsin Fair Dealership Law claim

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          In a recent decision of the U.S. District Court for the Eastern District of Wisconsin, the court held that an arbitration panel’s finding that federal securities laws preempt the application of the Wisconsin Fair Dealership Law (WFDL) could be made by the panel “without [panel members] taking leave of their senses.”  The ruling provides an example of another potential avenue for grantors to challenge the application of WFDL when federal law supports termination of the parties’ relationship.

          The petitioner, Renard, was an independent financial advisor who had entered a franchise agreement with Ameriprise Financial Services, Inc. (“Ameriprise”).  Ameriprise alleged that it terminated its agreement with Renard in June, 2011, shortly after determining that Renard had engaged in practices that violated federal securities laws.  Ameriprise then sought to collect the unpaid balance on promissory notes due from Renard; when payment was not forthcoming, Ameriprise filed for arbitration with Financial Industry Regulatory Authority (“FINRA”) Dispute Resolution.  The arbitration panel found Renard liable for damages of approximately $450,000, and dismissed his claims that Ameriprise violated the WFDL by failing to provide notice and an opportunity to cure as required by the WFDL.

          Renard filed suit seeking to vacate the panel’s award, to the extent that it dismissed petitioner’s counterclaims in the arbitration. The scope of the court’s review of the panel’s award, however, was limited.  Under both federal and state law, an arbitration award can be vacated only in specified, limited circumstances. Among the arguments made by Renard was that the arbitrators exceeded their powers by disregarding Wisconsin law in dismissing petitioner’s WFDL claims.

         Ameriprise responded that it had the right to immediately terminate Renard based on his alleged violations of federal securities laws, because federal law preempts any notice requirements of the WFDL and Ameriprise could be liable for Renard’s violations of  federal securities laws.  Renard’s expert testified that Ameriprise was required to comply with WFDL notice requirements “unless … doing so would be in violation of federal statute.”  The court found that based on the evidence and arguments presented, the arbitrators could have agreed with Ameriprise’s interpretation of the WFDL, and thus did not exceed their authority in dismissing the WFDL claims.

(Paul J. Renard v. Ameriprise Financial Services, Case No. 13-CV-555-JPS (E.D. Wis., 3/6/14).)

Filed Under: Wisconsin Fair Dealership Law, Federal preemption, Preemption, FINRA, Securities Law, Securities advisor, Securities

Going-Out-Of-Business Sale:  Is The Label Accurate?

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American TV & Appliance, a fixture on the Madison retail scene for over 40 years, announced in mid-February that it is going out of business.  In the days since, customers have flocked to American’s stores for its “Going Out Of Business” sale.

Everyone loves a bargain. Promotions described as a “close out”, “selling out” or “going out of business” sale (typically accompanied by the tagline “everything must go”)  can generate significant customer traffic for the retailer conducting the sale, and going-out-of-business promotions are frequently very successful.

State law, however, recognizes that the everything-must-go phenomenon can be abused. Unless the business is truly in a liquidation mode (like American), the use of the terms described above may be treated as “deceptive advertising” under section  100.18 of the Wisconsin Statutes.  Violations of that section can be prosecuted by the state Department of Agriculture, Trade and Consumer Protection, and consumers harmed by such advertising have private remedies (including the potential recovery of attorneys’ fees) as well.

One significant exception:  sales of seasonal merchandise, or of merchandise having a designated model year, may be described as “closing-out” sales of such specific merchandise, even if the business is continuing to operate.

Just as it’s buyer beware for those pursuing bargains at a “going out of business” sale,  there are risks to retailers who make misstatements when promoting “close-outs” and sales of their ilk.

Filed Under: Liquidation, Going-out-of-business sale, Closeout sale, Selling Out, Deceptive Advertising, Retailer

A Textbook Example of the Grey Market

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Out of the scores of disputes that arise with respect to “grey market” distribution channels, what are the odds that a case involving a Thai student doing business as “bluechristine99” on eBay would reach the U.S. Supreme Court?

“Grey market” refers to the sale of genuine branded products outside of established distribution channels established by a manufacturer. A manufacturer may provide different price structures to different markets and customers.  These price differentials create an opportunity for brokers and distributors to purchase products at discounted rates, but sell them in places where they can realize greater profits – in places not intended by the manufacturer. One example is the sale of on-line prescription drugs from Canadian distributors to individuals located in the U.S. The drug manufacturer sells the medications at a lower wholesale price in Canada; distributors take advantage of that lower price and resell over the internet and ship to U.S., thus undercutting retail prices charged in the U.S.

The “bluechristine99” case decided by the U.S. Supreme Court in March involved a textbook example of the grey market -- literally.  A student at Cornell University, Supap Kirtsaeng, had friends and family purchase English-language textbooks (which had been printed overseas) in Thailand and mail the textbooks to him in the U.S.  Using eBay as his distribution channel, Kirtsaeng re-sold the books at a profit.

The holder of the copyrights in the textbooks, publisher John A. Wiley & Sons, sued Kirtsaeng for copyright infringement, citing its exclusive right to distribute the copyrighted materials in the U.S.  Kirtsaeng asserted a defense based on the “first sale” doctrine of U.S. copyright law. Under that doctrine, the owner of a particular copy of copyright materials lawfully made under U.S. copyright law is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.

In the Kirtsaeng case, the issue was relatively narrow. The U.S. Supreme Court had previously held that goods manufactured in the U.S. and sold overseas were subject to the first sale doctrine, and thus the manufacturer could not bar subsequent sales of goods re-imported into the U.S. by asserting copyright infringement. In Kirtsaeng, the textbooks had been printed overseas, and not in the U.S.  The District Court and court of appeals found that distinction to be meaningful. But the U.S. Supreme Court did not. It overturned the district court’s finding of copyright infringement against Kirtsaeng, holding that the first sale doctrine defense applied to re-sales of copyrighted materials lawfully produced overseas.

The co-opting of distribution channels by brokers such as Kirtsaeng is only a part of the grey market problem in the distribution industry. Many grey market disputes involve parties who voluntarily have partnered to do business. Distributors and brokers may resort to buying or selling on the grey market for benign reasons (selling excess inventory at below-market prices, acquiring products on the grey market to meet customer demand when the manufacturer cannot deliver) or because they are engaging in more nefarious practices (falsely representing the identity of the end user to obtain additional discounts, exploiting pricing differentials between jurisdictions).

Whatever the reason for the practice, the grey market can damage a manufacturer.  There is the risk that items sold on the grey market are actually low-quality counterfeit goods that wind up disappointing the end user, hurting the goodwill of the legitimate brand and manufacturer.  If the goods aren’t purchased from an authorized dealer, there may be no warranty from the original equipment manufacturer.  Finally, those distributors who buy within established channels suffer financially while those bending the rules are rewarded, damaging the strength of the distribution system.

Addressing these issues can be difficult, especially for manufacturers without significant market power and who rely on large distributors to sell their products.  Contractual protections in distribution agreements are a critical starting point of any effort to curb grey market practices.

Filed Under: grey market, distribution, manufacturer, distributor, broker, Kirtsaeng, first sale doctrine

Eroding Exclusivity: The Saga of JCP, Macy’s and Martha Stewart

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Some observations on the ongoing trial in New York Supreme Court involving Macy’s, J.C. Penney (“JCP”) and Martha Stewart Living Omnimedia (“MSLO”), as the dispute pertains to the franchise and distribution industry:

  • Carveouts to exclusivity clauses should be viewed warily by the party purportedly receiving exclusive rights.  In the Macy’s/JCP/MSLO dispute, MSLO had granted Macy’s the exclusive right to market certain products (such as cookware and bedding) sold by MSLO. The exclusivity clause in the Macy’s/MSLO agreement, however, contained an exception permitting MSLO to sell the products via the internet, television or at any retail store branded with the Martha Stewart Living name and operated by the company or its affiliates or which “prominently” featured the brand.   JCP acquired a minority interest in MSLO; the parties then sought to utilize the exception to Macy’s exclusive retail sale rights by placing MSLO “boutiques” inside JCP stores to sell those same products.
  • Exceptions to exclusivity clauses can be found in many franchise agreements (e.g., outlets located within the territory, but inside airports or malls) and distribution and sales representative agreements (e.g., internet sales, house accounts or national accounts).  If an exception is overly broad or vague, the exception can severely erode the expectation of exclusivity.   

Filed Under: exclusivity, carveouts, franchise, distribution, sales representative

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