Lucent v. Microsoft: Damages

Lucent v. Gateway & Microsoft (Fed. Cir. 2009)

Lucent’s patent-in-suit claims was filed in 1986 and generally focuses on using an on-screen keyboard to enter information into a computer. In 2002, Lucent sued Microsoft and others for infringement. Since then, the patent has expired, but the litigation continues over past damages. Perhaps most notably, this case may serve as a reminder that a twenty year patent term represents a major span in the worlds of business and technology.

The primary infringing portion of Microsoft’s software appears to be the “date picker” function found in Microsoft calendars. In litigation, the jury sided with Lucent and awarded the patent holder with $350 million in damages. Here, I discuss three aspects of the opinion: damages; obviousness; and inducement.

Damages: Most of the action in the Federal Circuit decision revolves around damages. The parties appear to agree that Microsoft sold 110 million accused units with a total sales value of $8 billion. Based on that figure, Lucent requested $561 million in damages based on an 8% royalty rate of Microsoft’s sales revenue. Microsoft argued that the correct licensing rate should result in only $6 million lump sum in damages. On appeal, the Federal Circuit vacated the $350 million dollar award and remanded for a new trial solely on the issue of damages – finding that the original verdict was not supported by substantial evidence.

Reasonable Royalty Calculation: The Patent Act requires that a court award damages at least in the amount of a “reasonable royalty.” The hallmark of that calculation involves a hindsight reconstruction in an attempt to calculate the patentee’s differential “pecuniary condition . . . if the infringement had not occurred.” This is often done through a “hypothetical negotiation” reconstruction based on the Georgia-Pacific factors. See Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970); see also Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554 n.13 (Fed. Cir. 1995) (en banc).

Entire Market Value: When a patentee proves that the patent related feature serves as the predominant basis for customer demand, courts allow damages to be based upon the “entire market value” of the product (i.e., 8% of the sales revenue of Microsoft Office) rather than focusing on the incremental value of the innovation. Here, the Federal Circuit held that the “only reasonable conclusion” is that the date-picker function is not a substantial driver of Office sales. “There was no evidence that anybody anywhere at any time ever bought Outlook . . . because it had a date picker.”

Patentees typically prefer to invoke the entire market value rule because it seemingly tends to lead to higher total damage payouts. Of course, the market value only sets a base. Interestingly, the Federal Circuit recognized here that the bar on using the entire market value of a product is rather arbitrary.

Although our law states certain mandatory conditions for applying the entire market value rule, courts must nevertheless be cognizant of a fundamental relationship between the entire market value rule and the calculation of a running royalty damages award. Simply put, the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence). . . . Microsoft surely would have little reason to complain about the supposed application of the entire market value rule had the jury applied a royalty rate of 0.1% (instead of 8%) to the market price of the infringing programs. Such a rate would have likely yielded a damages award of less than Microsoft’s proposed $6.5 million.

The Court goes on to suggest that the entire market value rule has a place in cases where the invention is only a small portion of the product.

Some commentators suggest that the entire market value rule should have little role in reasonable royalty law. See, e.g., Mark A. Lemley, Distinguishing Lost Profits From Reasonable Royalties, 51 Wm. & Mary L. Rev. (forthcoming 2009) … Amy Landers, Let the Games Begin: Incentives to Innovation in the New Economy of Intellectual Property Law, 46 Santa Clara L. Rev. 307, 362 (2006) … But such general propositions ignore the realities of patent licensing and the flexibility needed in transferring intellectual property rights. The evidence of record in the present dispute illustrates the importance the entire market value may have in reasonable royalty cases.

Georgia Pacific Factors: In its opinion, the Federal Circuit emphasized the flexibility of its jurisprudence in deciding damages with an understanding that actual licensing (much less a hypothetical negotiation) is “complicated” and “inexact.” Ultimately, the case is being sent back for a new trial because the jury’s award was not logically tied to the evidence. (“[T] damages evidence of record was neither very powerful, nor presented very well by either party.”) Most notably lacking are comparable licensing agreements.

First, some of the license agreements are radically different from the hypothetical agreement under consideration for the Day patent. Second, with the other agreements, we are simply unable to ascertain from the evidence presented the subject matter of the agreements, and we therefore cannot understand how the jury could have adequately evaluated the probative value of those agreements.

Damages award vacated

Power Behind the Black Box of Obviousness: In a string of recent cases, the Federal Circuit has reinvigorated the notion that jury verdicts on the question of obviousness will likely be upheld on appeal. Here, Microsoft argued for a particular interpretation of the prior art that it presented. While being sympathetic to Microsoft’s argument, the court held that the defendant’s arguments did not meet the necessary burden.

When the underlying facts are taken in the light most favorable to Lucent, the non-moving party, the evidence reasonably permitted the jury to have decided that Microsoft did not prove by clear and convincing evidence that claim 19 would have been obvious.

Nonobviousness affirmed.

Inducement: Lucent’s case was built on the notion of contributory infringement. Microsoft’s software does not – just by itself – directly infringe Lucent’s asserted method claims. Rather, by selling the software, Microsoft leads its customers to directly infringe. Contributory infringement and inducement both require proof of underlying direct infringement. At trial, Lucent was unable to point to any actual instance where a Microsoft customer used Microsoft products to perform the claimed method. On appeal, the Federal Circuit affirmed the infringement finding by holding that circumstantial evidence was sufficient to support a conclusion that at least one person (other than the experts in the case) used the products in an infringing manner.

As in Moleculon, the jury in the present case could have reasonably concluded that, sometime during the relevant period from 2003 to 2006, more likely than not one person somewhere in the United States had performed the claimed method using the Microsoft products.

Infringement affirmed.

30 thoughts on “Lucent v. Microsoft: Damages

  1. 30

    Ned Heller wrote:
    “Furthermore, I think it is entirely right that such questions be given to the jury in the first place as the issue of obviousness is really is not a legal matter. Rather it is “judgment” of what one of ordinary skill in the art would understand to be obvious in view of the prior art. That clearly is a question of fact as it involves an assessment of the degree of difference between the prior art and the claimed invention. The differences between the prior art and the claimed invention has always been denominated an issue of fact in Supreme Court case law.”

    This leads to an obvious conclusion: patent cases need expert juries, specifically juries consisting of people of ordinary skill in the art.

    There is no way random people off the street can tell what’s obvious to a computer programmer, but a jury of computer programmers can tell right off.

    Likewise for any other field. In fact, it can go both ways: the jury of people of ordinary skill in the field may well identify nonobvious patents when laymen might think them obvious.

    This would probably fix practically all the problems in the patent system relating to obviousness *and* anticipation (since the jury members would actually have a background in the field, would know the “oral lore” of the field, would know what journals people in the field actually read, et cetera). It wouldn’t deal with preemption, but that’s still a huge set of benefits.

  2. 29

    Oy. This entire patent is anticipated; I personally used computer programs which fit those claims prior to 1986.

    And, of course, it’s obvious. For various options, programmers would ask “Should it be free-form entry or a menu?” And the answer sometimes was “Why not give both options?” So the prior art taught towards the “picker” or “combo box”.

    Worse, it also preempts — there’s no alternative way to implement the obvious solution to the “free-form or menu?” problem.

    So, invalid in three ways apart from subject matter (also invalid for subject matter, of course).

    What is *WRONG* with the patent system? Lucent should be fined for abusing the patent system, not rewarded.

  3. 28

    Max Drei, I think that’s right. If there are any questions of fact, the whole issue of obviousness has to be sent to the jury. The only question thereafter is whether there is sufficient evidence to support the jury verdict. The court itself cannot substitute its own judgment for that of the jury.

    Furthermore, I think it is entirely right that such questions be given to the jury in the first place as the issue of obviousness is really is not a legal matter. Rather it is “judgment” of what one of ordinary skill in the art would understand to be obvious in view of the prior art. That clearly is a question of fact as it involves an assessment of the degree of difference between the prior art and the claimed invention. The differences between the prior art and the claimed invention has always been denominated an issue of fact in Supreme Court case law.

    The greatest abuse in the pre-Fed. Cir. era was district court and appellate judges ruling from the bench that a patent was obvious based upon their personal assessment. Apparently, some among us who dislike juries would like to adopt the worst aspects of that era perhaps in a misguided attempt to improve the patent system.

  4. 27

    Well Ned, OK, and thanks, but I see above:

    “Where, as here, the content of the prior art, the scope of the patent claim, and the level of ordinary skill in the art are not in material dispute”

    and think that, in the normal run of cases, these matters are in material dispute, thereby sealing off the summary judgement path to quick and easy judgement.

    …which brings us back (as you say) to a jury finding the relevant facts, leaving neither the DC nor the CAFC judge any wiggle room, when pronouncing on the “ultimate question”: Obvious Y/N.

  5. 26

    MaxDrei and Smashmouth, our procedure is an adaptation of the procedure in England prior to 1789. There, actions to invalidate patents were in “equity” but disputed facts were tried at law. Search: “scire-facias.” In KSR, the Supremes stated: “The ultimate judgment of obviousness is a legal determination. Graham, 383 U.S., at 17, 86 S. Ct. 684. Where, as here, the content of the prior art, the scope of the patent claim, and the level of ordinary skill in the art are not in material dispute, and the obviousness of the claim is apparent in light of these factors, summary judgment is appropriate.”

    It appears that a court is entitled to decide the issue of validity only when the facts are not in dispute. Otherwise, there appears to be a right to a trial by jury protected by the 7th Amendment. I hardly think a court could overturn a jury verdict by simply disagreeing with it.

  6. 25

    That helps. Thank you Smash. You say:

    “The only rationale that makes sense ….”

    which reminds me of Sherlock Holmes explaining to Watson that, once you have eliminated the impossible, what remains MUST be the explanation, however improbable it may seem.

    CAFC and SCOTUS surely want i) obviousness resolved when possible, at the summary judgement stage and ii) open house to review obviousness decisions made in the District Court.

  7. 24

    Max Drei–
    In a jury trial, the fact-finder determines obviousness. In other words, obviousness is determined as if it were a mixed question of law and fact. Not unlike simple negligence. Again inconsistent with the proclamations that obviousness is a question of law (which of course would be determined by the judge, just like claim construction or a question of contract interpretation).

    The only rationale that makes sense is that the Fed. Cir. (and SCOTUS) prefer a regime where they can apply de novo review to determinations of obviousness (when found by the judge on a motion for summary judgment), and in particular, to encourage resolution of obviousness at the summary judgment stage.

  8. 23

    Smash, thanks for the answer to my question: obviousness, fact or law, including your:

    “…on appellate review, the factual findings underlying a determination of obviousness are reviewed under a standard appropriate for review of factual findings (either clear error or substantial evidence, depending on who is the fact-finder). So I take it your question is merely rhetorical.”

    The specific words from the present CAFC Decision that attracted my attention in Dennis’s extracts were:

    “…the evidence reasonably permitted the jury to have decided that Microsoft did not prove by clear and convincing evidence that claim 19 would have been obvious.”

    which left me thinking that the jury had done more than determine the underlying facts, going on to take the further step of actually deciding obvious Y/N, which further step I had thought was the province of the judge, not the jury.

    So, my confusion remains. Do you care to help me again?

  9. 22

    The opinion includes this dumb introduction: “In the 1970s, niche groups of hobbyists, including two teenagers in a Los Altos garage, built personal computers from scratch.”

    This is a reference to Steve Jobs’ parents’ Los Altos garage where he and Steve Wozniak designed the first Apple computers. Wozniak was no teenager at the time; he was in his mid-20’s (he was born in 1950). Jobs was also probably not a teenager. The Federal Circuit: Can’t even get gratuitous facts right!

  10. 21

    Dennis: “Here, the Federal Circuit held that the “only reasonable conclusion” is that the date-picker function is not a substantial driver of Office sales. “There was no evidence that anybody anywhere at any time ever bought Outlook . . . because it had a date picker.”
    ————–

    I just felt a disturbance in The Farce, like a million patent trolls crying out at once.

  11. 20

    “Say that 100 people in the U.S. actually do use the method when using Outlook. Should all 110 million copies of Outlook have the royalty assessed?”

    I think, legally, the answer has to be *helll no!* The reason is that in order for inducement or contributory infringement to apply, infringement of the claim must have actually occurred. Merely telling someone to practice a claimed method is not inducing infringement if, in fact, nobody actually practices the claimed method. Likewise, if I promise that anyone who buys my device will be able to practice the method claimed in patent X, it’s not induced infringement if I sell a billion copies and the device isn’t actually capable of doing what is claimed.

  12. 19

    “Allocate proof of use to plaintiffs, and defendants get away with murder because it will be hard to prove actual use of particular features”

    It’s called a survey. Not sure what the difficulty is here.

  13. 18

    Just visiting, I don’t disagree with your analysis. The problem is how to implement this. We can reduce the royalty rate twice, once because the feature is small, and a second time because it is rarely (or at least not universally used). These are distinct because a small component can be used frequently (e.g. a single letter on your keyboard, which is surely a small component of a computer); and a large component can be used infrequently (e.g. I have never used the email function on my cell phone). As of this case, the Federal Circuit is finally getting around to seriously discounting royalty rates because the patented component is small relative to the rest of the royalty base. It is not, as far as I can tell, discounting for rarity of use. This may be because of difficulty of proof; but that is what makes this issue so interesting. Allocate proof of use to plaintiffs, and defendants get away with murder because it will be hard to prove actual use of particular features, even though it is highly unlikely that no consumer uses the feature. But the same difficulty of proof affects defendants when the burden is reversed–so apparently every consumer is presumed to use the method even when that is (also) unlikely to be true.

  14. 17

    19. A method for use in a computer having a display comprising the steps of

    displaying on said display a plurality of information fields,

    identifying for each field a kind of information to be inserted therein,

    indicating a particular one of said information fields into which information is to be inserted and for concurrently displaying a predefined tool associated with said one of said fields, said predefined tool being operable to supply information of the kind identified for said one field, said tool being selected from a group of predefined tools including a tool adapted to supply an individual entry from a menu of alternatives and at least a tool adapted to allow said user to compose said information, and

    inserting in said one field information that is derived as a result of said user operating said displayed tool.
    ———————————

    If this garbage isn’t obvious in view of any of a million non-computer based embodiments, then what isn’t? Take, for example, a baseball scoreboard where numbers are hung on hooks in the inning boxes using a pole.

    It’d be one thing if the method actually recited some non-obvious code, of course, that allowed this process to run faster than anyone would have expected. But without it, it’s just obvious crap, albeit implemented with the aid of a POWERFUL COMPUTER BRAIN. Is this the stuff that Kappos wants the PTO to start pumping out “without delay”?

  15. 16

    The IPO News report [giving this case a “4 star” importance rating] notes: “The court assumed the jury applied the “entire market value rule” – that the entire market value of a product can be used if the patent owner can prove that “the patent–related feature is the basis for customer demand.” Lucent did not prove the entire market value rule was applicable. The Federal Circuit explained appropriate uses of the entire market value rule, including the use of a multiplier to account for “the proportion of the base represented by the infringing component or feature.”
    But since the Court reaffirmed that the “entire market rule” can only be used for infringement damage calculations where only the patented feature is causing the product demand, how is it logical to use such a proportial base in that damage calculation?
    Or is this a waffle on “patented feature” [a real sore point in the prior patent reform bills] to cover “aggregation” claims that literally cover all or a large part of the product even though the actual novelty contribution is a very small part of the product?

  16. 15

    Max Drei said:
    “But, Dennis, I’m confused on one thing. I thought it had been decided that obviousness is a matter of law. Yet, from the present case, I get the feeling that it is one of fact. Which is it, please?”

    You seem to have enough knowledge from your other postings to realize that U.S. law on this matter is contradictory. OTOH the Fed. Cir. has held that obviousness is a question of law revied de novo (and SCOTUS did exactly that in KSR). Yet the reality is that obviousness usually involves conflicting testimony of expert witnesses, or in other words, requires the fact-finder to resolve conflicting versions of the facts. And supposedly on appellate review, the factual findings underlying a determination of obviousness are reviewed under a standard appropriate for review of factual findings (either clear error or substantial evidence, depending on who is the fact-finder). So I take it your question is merely rhetorical.

  17. 14

    Relevant excerpts from U.S. pat. no. 4,763,356:

    First the specification:

    (go to the following link: link to patft.uspto.gov

    Here’s claim 19:

    19. A method for use in a computer having a display comprising the steps of

    displaying on said display a plurality of information fields,

    identifying for each field a kind of information to be inserted therein,

    indicating a particular one of said information fields into which information is to be inserted and for concurrently displaying a predefined tool associated with said one of said fields, said predefined tool being operable to supply information of the kind identified for said one field, said tool being selected from a group of predefined tools including a tool adapted to supply an individual entry from a menu of alternatives and at least a tool adapted to allow said user to compose said information, and

    inserting in said one field information that is derived as a result of said user operating said displayed tool.

  18. 13

    Malcolm Mooney said:
    “I guess two obvious possibilities are low intelligence and/or a pro-patentee bias. Where is this district court located?”

    From the slip op.:
    “Appealed from: United States District Court for the Southern District of California
    Judge Marilyn L. Huff”

    link: link to cafc.uscourts.gov

  19. 12

    “Say that 100 people in the U.S. actually do use the method when using Outlook. Should all 110 million copies of Outlook have the royalty assessed?”

    Maybe this factor should be used to reduce the royalty rate rather than the royalty base unless the ratio of users to non-users were really as tiny as you propose. For example if about 10% of all users actually use a feature, then a calculation based on all users might still make sense. I suppose we could argue about who has to prove what. It makes sense to me that if Outlook is thrown out there for everyone to use, the indirect infringrer might need to prove that most users avoid using the infringing feature.

  20. 11

    Overall I think this is a good opinion, much better than the usual mess we get in damages opinions, which usually just throw everything to the jury or district court. But the last portion on indirect infringement raises particularly interesting issues. The theory of indirect infringement is that it substitutes for collecting from direct infringers, who are so numerous and individually small that separate suits are not feasible. But if that is the rationale, then it make sense to limit damages to the proved instances of infringement, only with collection from Microsoft which can then pass down the cost. Here, the court seems to be de facto saying that every Outlook copy is an infringement (though assessed at a low, low royalty due to the infringing feature being a small component of Outlook). If so, that appears to expand the patent right of a method claim beyond using a method, but incorporating the capability of using a method (or advertising the capability of using a method). Say that 100 people in the U.S. actually do use the method when using Outlook. Should all 110 million copies of Outlook have the royalty assessed?

  21. 9

    “As a non-litigator, can anyone explain how a judge can fail to see the absurdity of 8% damages on a feature that is a tiny fraction of an overall whole?”

    I guess two obvious possibilities are low intelligence and/or a pro-patentee bias. Where is this district court located?

  22. 8

    “I thought it had been decided that obviousness is a matter of law. Yet, from the present case, I get the feeling that it is one of fact. Which is it, please?” See the Professor’s August 19 note on the Medela v. Kinetic Concepts cert petition asking whether an accused infringer is entitled to an independent judicial (rather than lay jury) determination of obviousness: link to patentlyo.com

  23. 7

    Re: “can anyone explain how a judge can fail to see the absurdity of 8% damages on a feature that is a tiny fraction of an overall whole?”
    Yes. Until now, both D.C. and CAFC judges have almost always been happy to let juries decide whatever damages they wants to, and were very reluctant to reverse the jury verdict, unless there was an objected-to legal error in the [very lengthy] prior instructions to the jury by the judge [even if juries don’t remember or understand all of those instructions].

  24. 6

    An 8% royalty on the total sales volume of the product is rather ridiculous… even if we were talking about spell check, surely that feature isn’t worth 8% of an office suite. Rather, we’re talking about the ability to pick a date. Try 0.005%… that would be more like it.

  25. 5

    It doesn’t take expertise in damages law to grasp that the date-picker in Outlook is of little consequence. Here’s a theoretical way to look at the absurdity of the original damages award. Count the number of fundamental UI features in Outlook tha are similary to a date-picker. For discussion, suppose there are 50, and suppose that is the bulk of the application. Now, suppose the patent holder has a different patent on each. Now p.h. asks for 8% on each infringement. In other words, 400% damages.

    As a non-litigator, can anyone explain how a judge can fail to see the absurdity of 8% damages on a feature that is a tiny fraction of an overall whole? How is an award like that, even if overturned, possible to begin with?

  26. 4

    The Federal Circuits very detailed analysis of Microsoft’s important legal challenge to the amount of damages for patent infringement seems directly relevant to, and “takes a lot of the wind out of the sails” of, both sides of the previously hot patent reform legislation debate over “damages apportionment.”*
    Especially by also reaffirming that the “entire market rule” for damages simply cannot apply in a case like this.* Also, that lump sum damages awards are more comparable to lump sum licenses being negotiated in advance, rather than [de facto ex post facto] running-royalty license calculations.
    On the other hand, Microsoft’s attack on the District Court’s “gatekeeping” got short-shrift here, and that might affect the latest compromise bill with that provison.
    I also think the damages phase of big patent infringement cases is likely to get longer and more expensive after all the things the CAFC has said here can “go into the pot” for evidence on that subject.

    Paul
    —————————
    *Page 49 of this decision:
    “The parties presented little evidence relating to Factor 13. Nonetheless, the only reasonable conclusion is that most of the realizable profit must be credited to non-patented elements, such as “the manufacturing process, business risks, or significant features or improvements added by [Microsoft].” … “Outlook consists of millions of lines of code, only a tiny fraction of which encodes the date-picker feature. Although the weighing of Factor 13 cannot be reduced to a mere counting of lines of code, the glaring imbalance between infringing and non-infringing features must impact the analysis of how much profit can properly be attributed to the use of the date-picker compared to non-patented elements and other features of Outlook. Here, numerous features other than the date-picker appear to account for the overwhelming majority of the consumer demand and therefore significant profit.
    The only reasonable conclusion that can be drawn from this evidence is that the infringing use of Outlook’s date-picker feature is a minor aspect of a much larger software program and that the portion of the profit that can be credited to the infringing use of the date-picker tool is exceedingly small. For these reasons, Factors 10 and 13 of Georgia-Pacific
    provide little support for the jury’s lump-sum damages award of $357,693,056.18.”

  27. 3

    “Does the CAFC’s reinjection of Georgia-Pacific into the calculus mark the beginning of the end of “patent reform” ala the “coalition for patent fairness”?”

    FC,

    It could. The “lightning rod” in so-called “patent law reform” legislation was the damages calculattion issue. How the Federal Circuit handled the damages issue in Lucent Technologies was certainly being looked at carefully by those interested in the so-called “patent law reform” legislation. The Federal Circuit’s handling of the damages issue here should give those concerned about large damage awards based on the “entire market value rule” (or any other of the Georgia-Pacific factors) greater comfort. As you read Michel’s 30 page opinion on the damages issue, you see mounting skepticism that the patentee had sufficient evidence to support the jury’s verdict for ~$357 million. In fact, Lucent barely scraped by proving there was direct infringement sufficient to support inducing infringement and contributory infringement.

    MD,

    I think you’re right that the Federal Circuit was concerned about a “mega” damage award here, especially one where the evidence presented really didn’t support it. What was odd was that Lucent pushed for damages based on a “running royalty” while Microsoft pushed for damages based on a “lump-sum royalty” but only $6.5 million. Ironically, the jury made this “mega” award based on a “lump-sum royalty” theory proposed by Microsoft but for a much larger amount consistent with a “running royalty” theory. Needless to say Lucent had a more difficult case justifying this “mega” award on a “lump-sum” theory.

  28. 2

    Dennis thanks for the extracts from the Decision. I can’t remember reading a string of words more chilling for investment in manufacture and trade in the United States than:

    “the evidence reasonably permitted the jury to have decided that Microsoft did not prove by clear and convincing evidence that claim 19 would have been obvious.”

    But, then again, I can’t think of a string of words that offers more comfort for inventors who demand that American patent rights be “strong”.

    From the extracts, I have the feeling that the CAFC wants to “talk down” the high quanta of damages that have come to be seen as normal. Is this a way to reduce the negative impact of an ongoing stream of incompetent jury decisions that have to be maintained on appeal? Is it a way to reduce the attractiveness of patent litigation to trolls and contingency fee lawyers?

    But, Dennis, I’m confused on one thing. I thought it had been decided that obviousness is a matter of law. Yet, from the present case, I get the feeling that it is one of fact. Which is it, please?

  29. 1

    Does the CAFC’s reinjection of Georgia-Pacific into the calculus mark the beginning of the end of “patent reform” ala the “coalition for patent fairness”?

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