     Case: 13-40807   Document: 00512688074    Page: 1   Date Filed: 07/07/2014




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                                 United States Court of Appeals
                                                                          Fifth Circuit

                                                                        FILED
                                No. 13-40807                         July 7, 2014
                                                                   Lyle W. Cayce
UNITED STATES OF AMERICA, ex rel. RENE SHUPE                            Clerk


                                          Plaintiff - Appellee
v.

CISCO SYSTEMS, INCORPORATED; AVNET, INCORPORATED;
CALENCE, L.L.C., also known as Insight Enterprises, Incorporated,

                                          Defendants - Appellants




                Appeal from the United States District Court
                     for the Southern District of Texas


Before SMITH, CLEMENT, and HIGGINSON, Circuit Judges.
PER CURIAM:
      Defendant telecommunication companies file an interlocutory appeal of
the denial of a motion to dismiss for failure to state a claim under the False
Claims Act, 31 U.S.C. § 3729. For the following reasons, we REVERSE the
judgment of the district court and REMAND for further proceedings.
                      FACTS AND PROCEEDINGS
      Relator Rene Shupe brought a qui tam action on behalf of the United
States alleging that defendant telecommunication companies violated the
False Claims Act (“FCA”), 31 U.S.C. § 3729, while bidding for and being
awarded contracts to install and operate communications networks for school
districts and libraries throughout South Texas.      Partial funding for the
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installation and operation of these networks came through the Education Rate
(“E-Rate”) Program, administered by the Universal Service Administrative
Company (“USAC”) with funds from the Universal Service Fund (“USF”).
      The    USAC     and    the    USF     were    byproducts     of   the   1996
Telecommunications Act and the Federal Communications Commission
(“FCC”) rulemaking that followed. 47 U.S.C. § 254; 47 C.F.R. §§ 54.701, 54.702.
USAC is an independent, not-for-profit corporation designated by the FCC as
the administrator of the USF. USAC collects mandatory contributions from
telecommunications carriers and distributes some of these funds through the
E-Rate Program, which funds telecommunications services, internet access,
internal connections, and basic network maintenance in the form of price
discounts for eligible services. 47 C.F.R. § 54.504.
      To obtain E-Rate funds an applicant must develop a technology plan
outlining its technology needs and submit it for approval to the state, the
USAC, or an independent entity approved by the FCC or certified by the USAC
as qualified to provide approval. 47 C.F.R. § 54.508. The applicant then files
a request for proposals with the USAC to begin a bidding process that is
required to be fair and open to competition. 47 C.F.R. § 54.503. After receiving
bids and selecting a service provider, the applicant submits a form to the USAC
certifying it has complied with the requirements of the program and requesting
discounts for the services. 47 C.F.R. § 54.504.
      Shupe, who worked as a project manager for a telecommunications
installer, alleges that the defendants tampered with the competitive bidding
process, engaged in the “gold-plating” of equipment provided, and substituted
E-Rate ineligible products for eligible ones in violation of the FCA by
presenting materially false or fraudulent claims for payment or approval by
the United States, by using or causing to be used false records or statements
regarding equipment to be installed, and by conspiring with each other to
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                                       No. 13-40807
defraud the United States. The government investigated Shupe’s claims and
declined to intervene in the suit.
       Defendants filed a motion to dismiss for failure to state a claim under
Federal Rule of Civil Procedure 12(b)(6) and Federal Rule of Civil Procedure
9(b)’s heightened pleading standard for fraud claims. The relevant arguments
for this appeal were that the FCA causes of action must be dismissed because
the USAC is not a government body or funded with government dollars, and
the alleged actions taken by defendants do not constitute false claims under
the FCA. 1
       The district court denied the motion on May 13, 2013. It rejected the
idea that the “funds must be deposited into the Treasury and/or distributed by
a government body for there to be a claim under the FCA . . . . The only
requirement is that the government provide or reimburse a portion of the
money or property that is requested.” Because the USAC funds are collected
under a mandate from the government and distributed in accordance with FCC
regulations, the district court found that the government provided the money.
The district court pointed to the “broad definition” of a claim in the FCA and
the legislative history of the act to support a “broad application.” The district
court found the USAC a “grantee, recipient, and agent” of the government.
       The defendants asked the court to certify for interlocutory appeal the
threshold issue of whether FCA liability extends to requests submitted to the
USAC for reimbursement from the USF. The defendants argued that the
district court’s order created a conflict with Lyttle v. A T & T Corp., No. 2:10-



1Defendants also argued that Shupe’s claims should be dismissed because they were based
on publicly disclosed information; that Shupe did not plead his fraud claim with sufficient
particularity under Rule 9(b); that Shupe failed to allege his claims against defendants Cisco
and Calence with sufficient particularity; and that any causes of action against Calence
alleged to have arisen before July 14, 2005, must be dismissed because the company did not
exist at that date.
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1376, 2012 WL 6738149 (W.D. Pa. Dec. 28, 2012) (adopting report and
recommendation). The district court granted the defendants leave to apply for
an interlocutory appeal on June 11, 2013.
                            STANDARD OF REVIEW
      We review de novo a district court’s ruling on a Rule 12(b)(6)
      motion. United States ex rel. Willard v. Humana Health Plan of
      Tex. Inc., 336 F.3d 375, 379 (5th Cir. 2003). We accept all well-
      pleaded factual allegations as true, and we interpret the complaint
      in the light most favorable to the plaintiff. Id. The plaintiff’s
      factual allegations must support a claim to relief that is plausible
      on its face and rises above mere speculation. United States ex rel.
      Marcy v. Rowan Cos., 520 F.3d 384, 388 (5th Cir. 2008). In
      addition, claims brought under the FCA must comply with the
      particularity requirements of Rule 9(b). United States ex rel.
      Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903
      (5th Cir. 1997). Rule 9(b) requires, at a minimum, “that a plaintiff
      set forth the ‘who, what, when, where, and how’ of the alleged
      fraud.” Id.; see also United States ex rel. Rafizadeh v. Cont'l
      Common, Inc., 553 F.3d 869, 872–73 (5th Cir. 2008).
United States ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 266 (5th
Cir. 2010).
                                   DISCUSSION
      This case decides when the Government “provides any portion of”
requested money, as to trigger the protection of the False Claims Act, a statute
that shadows every aspect of the administrative state. 31 U.S.C. § 3729(c)
(2008). The FCA’s pre-amendment definition of a “claim” requires that the
claimant request money that “[t]he United States Government provides any
portion of” or “will reimburse . . . any portion of.” 31 U.S.C. § 3729(c) (2008).
Our opinion involves an outdated version of the False Claims Act, 2 but the key


      2  The FCA was amended in 2009. The district court analyzed these claims under the
prior version of the FCA because the amendments were not made retroactive to conduct
before the date of enactment, May 20, 2009. The prior version of the statute stated that
       Any person who--
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term “provides” is reproduced in the now amended statute, which defines a
“claim” as, among other things:
      [A]ny request or demand . . . for money or property and whether
      or not the United States has title to the money or property, that
      . . . is made to a contractor, grantee, or other recipient, if the money
      or property is to be spent or used on the Government’s behalf or to
      advance a Government program or interest, and if the United
      States Government . . . provides or has provided any portion of the
      money or property requested or demanded.
      31 U.S.C. § 3729(b)(2)(A)(ii)(I) (2012) (emphasis added). Accordingly, the
rule extracted from our opinion will influence the reach of the False Claims Act
current and past. We decide that the Government “provides any portion” of
the money requested under § 3729(c) when United States Treasury dollars flow
to the defrauded entity or if the false claim is submitted to a Government
entity.
      “The FCA generally permits the Government or a party suing on the
Government’s behalf to recover for false claims made by the defendants to
secure payment by the Government.” United States ex rel. Doe v. Dow Chem.
Co., 343 F.3d 325, 329 (5th Cir. 2003). We have explained that to state a claim
under the FCA in our circuit, “a plaintiff must allege: (1) a false statement or



             (1) knowingly presents, or causes to be presented, to an officer or
      employee of the United States Government or a member of the Armed Forces
      of the United States a false or fraudulent claim for payment or approval;
             (2) knowingly makes, uses, or causes to be made or used, a false record
      or statement to get a false or fraudulent claim paid or approved by the
      Government;
             (3) conspires to defraud the Government by getting a false or fraudulent
      claim allowed or paid . . .
      is liable to the United States Government for a civil penalty of not less than
      $5,000 and not more than $10,000, plus 3 times the amount of damages which
      the Government sustains because of the act of that person . . .
      31 U.S.C. § 3729(a) (1994).

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fraudulent course of conduct; (2) made or carried out with the requisite
scienter; (3) that was material; and (4) that is presented to the Government.”
Steury, 625 F.3d at 267.

       The Government’s position is that “provides” means “to make available,”
and that the Government makes money available when it “direct[s] the
collection and disbursement of . . . funds.” Gov’t Br. 2. This broad view of the
statutory term is unsupported by the cases interpreting the FCA. To be sure,
courts have found that the Government “provides any portion” of the money
requested when the Government has given even a drop of treasury money to
the defrauded entity. See, e.g., United States ex rel. DRC, Inc. v. Custer Battles,
LLC,       562       F.3d       295,        303–04      (4th      Cir.       2009)
(“Textually, therefore, a claim made to a grantee of U.S. money is not defined
by the amount of money that the U.S. government paid directly to the claimant.
So long as ‘any portion’ of the claim is or will be funded by U.S. money given to
the grantee, the full claim satisfies the definition of claim.”); United States ex
rel. Shank v. Lewis Enters., Inc., No. 04-CV-4105–JPG, 2006 WL 1207005, at
*7 (S.D. Ill May, 3, 2006) (holding that Abandoned Mine Reclamation Fund
(“AMRF”) was covered by FCA because “defendants do not even argue that all
the money in the AMRF is private, they just say that money from the coal
mines is the ‘primary source[ ]’ of funding. Implicitly, then, defendants admit
some portion of the funds come from the government.”).

       Courts have also identified entities that do not receive Government
funds, but nevertheless are covered by the FCA because of their status as
Government entities. See e.g., United States v. McNinch, 356 U.S. 595, 598
(1958) (holding that the Federal Housing Administration is covered by the FCA
because “[t]he FHA is an unincorporated agency in the Executive Department
created by the President pursuant to congressional authorization. Its head,

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the Federal Housing Commissioner, is appointed by the President with the
Senate’s consent, and the powers of the agency are vested in him. The agency
is responsible for the administration of a number of federal housing programs
and operates with funds originally appropriated by Congress. In short, the
FHA is about as much a part of the Government as any agency can be.”); United
States v. Mackby, 261 F.3d 821, 824, 826 (9th Cir. 2009) (noting that it is
undisputed that a claim for Medicare payment triggers the FCA); United States
v. Hicks, No. 04-4189-GPM, 2008 WL 1990436, at *3 (S.D. Ill. May 5, 2008)
(holding that false claims may be made against United States Postal Service
and noting that “[a]lthough the Postal Service is a ‘self-funding’ entity, this is
not to say that it is divorced from the United States Treasury. The Postal
Service is self-funding only in the sense that Congress has appropriated to it
all of the Postal Service’s own revenues. It nevertheless is ‘operated as a basic
and fundamental service provided to the people by the Government of the
United States.’” (quoting Baker v. Runyon, 114 F.3d 668, 672 (7th Cir. 1997)).
      Importantly, however, courts have identified programs that do not
trigger FCA protection because they do not receive federal funds and they have
too tenuous of a relationship to the Government to be considered a Government
entity. See, e.g., United States ex rel. Sanders v. Am.-Amicable Life Insur. Co.
of Tex., 545 F.3d 256, 259 (3d Cir. 2008); United States ex rel. Totten, 380 F.3d
488, 493 (D.C. Cir. 2004) (holding that claim against Amtrak not presented to
the Government and noting that “[t]he word ‘provides’ in Section 3729(c), when
appropriately limited to the present tense, squares neatly with a presentment
requirement. False Claims Act liability will attach if the Government provides
the funds to the grantee upon presentment of a claim to the Government.”);
Hutchins v. Wilentz, Goldman & Spitzer, 253 F.3d 176, 184 (3d Cir. 2001)
(holding that submission of fraudulent legal bills for approval to the United
States Bankruptcy Court does not violate the False Claims Act because “the
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submission of false claims to the United States government for approval which
do not or would not cause financial loss to the government are not within the
purview of the False Claims Act”); Costner v. URS Consultants, Inc., 153 F.3d
667, 677 (8th Cir. 1998) (holding that United States involvement in
negotiations that led to the stipulation under which a private entity agreed to
put money into a fund for environmental clean-up costs did not trigger the FCA
because “[n]one of the money in the private Vertac trust fund, long since
depleted, was provided by the United States Government. No federal funds
were ever intermingled with that fund. The United States had no access to the
trust fund, nor did it have any control over its disbursement, which was
overseen by the State of Arkansas. Moreover, no money disbursed from the
private fund was ever reimbursed by the federal government”); see also Garg
v. Covanta Holding Corp., 478 F. App’x 736, 741 (3d Cir. 2012) (“At best, Garg’s
complaint established that UCUA had to pay money out of its general
operating funds that it should not have had to pay.        The fact that some
unknown portion of those general operating funds might be tangentially
attributable to a tax break from the federal government is irrelevant. . . . With
or without Covanta’s alleged fraud, the treasury of the United States would be
in the same position. In sum, the federal government does not lose out from
Covanta’s supposed fraud.”); United States ex rel. Fellhoelter v. Valley Milk
Products, L.L.C., 617 F. Supp. 2d 723, 731 (E.D. Tenn. 2008) (“The alleged
‘claims’ in this case do not reach or threaten to reach government funds. The
money Valley Milk has allegedly received by paying less than the blend price
came from the Settlement Fund, money provided solely by milk producers. . . .
The court concludes that these alleged frauds are not claims against the
government fisc as required by the FCA.”).
      This last set of cases reveals that courts have limited the FCA’s
application to “instances of fraud that might result in financial loss to the
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Government.” Sanders, 545 F.3d at 259 (internal quotations omitted); see also
Costner, 153 F.3d at 677 (“Essentially, then, only those actions by the claimant
which have the purpose and effect of causing the United States to pay out
money it is not obligated to pay, or those actions which intentionally deprive
the United States of money it is lawfully due, are properly considered ‘claims’
within the meaning of the FCA.”). The money in the USF is untraceable to the
United States Treasury. Accordingly, although the United States may have a
regulatory interest in the E-Rate program, the United States does not have a
financial stake in its fraudulent losses. That recovery for an unquantifiable
regulatory interest falls outside of the scope of FCA protection is further
supported by the FCA’s damages provision, which provides a penalty of “3
times the amount of damages which the Government sustains.” 31 U.S.C.
§ 3729(a) (2008) (emphasis added).
      Acknowledging this, the Government urges that the FCA applies
because of the extent of the FCC’s control over the E-Rate program. This
control-based test fails to distinguish Hutchins, in which the Third Circuit
addressed “fraudulent legal bills for approval to the United States Bankruptcy
Court” and rejected the argument that “even if no claim were made against
United States Treasury money in connection with the law firm’s inflated legal
bills, the submission of these bills for approval by the Bankruptcy Court
violates the False Claims Act.” 253 F.3d at 180, 183. That the bankruptcy
court could approve a portion or all of these claims did not matter because “the
Act is only intended to cover instances of fraud ‘that might result in financial
loss to the Government.’” Id. at 183 (quoting United States v. Neifert-White
Co., 390 U.S. 228, 232 (1968)). Moreover, the Government’s involvement in
creating the privately capitalized clean-up fund in Costner was insufficient to
sustain a claim under the FCA because “[a]ny allegedly false claims for


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                                No. 13-40807
payment made by defendants to the Vertac trust fund had no nexus to the
United States.” 153 F.3d at 677.
      Courts differentiate between entities that are the Government and those
that are not by looking at their statutes rather than the extent of Government
supervision.   In Totten, for example, then-Judge Roberts distinguished
Rainwater v. United States, 356 U.S. 590 (1958), which held that the
Commodity Credit Corporation was part of the Government for FCA purposes.
Totten explained, “the statute in that case expressly provided that the
Corporation was “an ‘agency and instrumentality of the United States.’”
Totten, 380 F.3d at 492. Next, then-Judge Roberts distinguished Amtrak’s
statute: “Amtrak’s statute, of course, gives Amtrak the exact opposite status:
Attempts to analogize the other facts in Rainwater—that all of the Commodity
Credit Corporation’s employees were employees of the U.S. Department of
Agriculture, and that the entire budget of the Corporation came from the
federal treasury—are similarly fruitless.” Totten, 380 F.3d at 492 (internal
citations omitted).
      The Postal Service’s statute similarly explains: “The United States
Postal Service shall be operated as a basic and fundamental service provided
to the people by the Government of the United States, authorized by the
Constitution, created by Act of Congress, and supported by the people.” 39
U.S.C. § 101(a) (emphasis added). And the Supreme Court recognized that
“The FHA is an unincorporated agency in the Executive Department created by
the President pursuant to congressional authorization. . . . The agency is
responsible for the administration of a number of federal housing programs
and operates with funds originally appropriated by Congress.” McNinch, 356
U.S. at 598 (emphasis added).
      Illustratively, in another FCA case the Government did “not challenge
the defendants’ contention that the FCA, prior to the 2009 amendments, has
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no application to Fannie Mae or Freddie Mac.” Brief for United States at 2 n.2,
United States ex rel. Adams v. Wells Fargo Bank Nat’l Ass’n, No. 2:11–cv–
00535–RCJ–PAL, 2013 WL 6506732 (D. Nev. Dec. 11, 2013). Fannie Mae’s
enacting statute, for example, explains:
      The purposes of this title include the partition of the Federal
      National Mortgage Association as heretofore existing into two
      separate and distinct corporations. . . . One of such corporations,
      to be known as Federal National Mortgage Association, will be a
      Government-sponsored private corporation, will retain the assets
      and liabilities of the previously existing corporation accounted for
      under section 1719 of this title, and will continue to operate the
      secondary market operations authorized by such section 1719.
12 U.S.C. § 1716b. The same statute explains that the other corporation, by
contrast, will “be known as Government National Mortgage Association, [and]
will remain in the Government.” Id. (emphasis added).
      Although we have recognized in other contexts that “the Congressional
Budget Office has treated universal service fund contributions as federal
revenues,” Tex. Office of Pub. Util. Counsel v. F.C.C., 183 F.3d 393, 427 (5th
Cir. 1999), courts have explained that the program is independent from the
Government:
      While we recognize that the FCC does hold substantial power over the
      fund indirectly, essentially by overseeing USAC, we also recognize that
      it has no ability to control the USF through direct seizure or
      discretionary spending. We hold that USAC, which, as administrator of
      the USF, has discretion over if, when, and how it disburses universal
      service funds to beneficiaries, holds dominion over the USF.
In re Incomnet, 463 F.3d 1064, 1071 (9th Cir. 2006). Moreover, “[w]hen the
FCC created NECA [USAC’s sole shareholder and therefore the program’s
administrator], it made clear that NECA acted exclusively as an agent for its
members and had no authority to perform any adjudicatory or governmental
functions.” Farmers Telephone Co., Inc. v. FCC, 184 F.3d 1241, 1250 (10th Cir.
1999).
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      At least one lower court that has closely considered the question for a
similar fund has rejected the same arguments that Shupe and the United
States now advance. Lyttle v. A T & T Corp., No. 2:10-1367, 2012 WL 6738242,
*15-21 (W.D. Pa. Nov. 14, 2012). 3 A relator there brought a false claims case
against a telephone company on allegations that the company fraudulently
certified compliance with FCC regulations while seeking reimbursement from
a fund created to subsidize a service to help deaf or speech-impaired persons
communicate via phone. Id. at *1-10. The fund for the services was established
through congressional and FCC action and initially administered by the same
National Exchange Carrier Association, Inc., that oversees the E-Rate fund.

      The United States argued that
      1) the Administrator is an agent of the United States for purposes
      of reimbursing money from the Fund (even if not for other
      purposes); [and] 2) the money is “provided by” the United States
      because it is collected based on Congressional levy and because it
      is a line item in the federal budget . . . .
Id. at *13. The defendants responded that “1) the Administrator is not an
‘agent’ of the FCC because it had no authority to bind the FCC by its actions;
[and] 2) the contractor provision does not apply because the United States does
not ‘provide’ the funds . . . .” Id. at *14.
      The magistrate judge rejected the argument that the United States
“provides” any portion of the money in the funds.               Id. at *18-21.      Any
submission of false claims did not “cause financial loss to the government.” Id.
at *20. Nor could the Government cite “a case in which a court has held that,
although money was put into a fund and taken out of it by private parties, the
Government nevertheless ‘provided’ the funds because it required that such



      3 The Magistrate Judge analyzed the claims under the amended version of the FCA,
which arguably broadens the basis for claim liability from the version we consider today.
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money be paid or because the program is included in the federal budget.” Id.
at *21. The district court adopted the magistrate judge’s recommendation as
its opinion. Lyttle, 2012 WL 6738149, at *1.
      Like the court concluded in Lyttle, we conclude that the Government did
not provide the funds to the USF to subject claims to it to FCA liability. The
text of the relevant version of § 3729(a) speaks of making false claims to “the
United States Government,” seeking to get false claims paid “by the
Government,” or conspiring “to defraud the Government.” The Supreme Court
has been clear that § 3729(c)’s definition of claim does not expand FCA liability
over acts directed towards parties that are not “the Government.” Allison
Engine Co. v. United States ex rel. Sanders, 553 U.S. 662, 669-70 (2008).
Although USAC came about through the actions of Congress and the FCC, and
the FCC retains some oversight and regulation, it is explicitly a private
corporation owned by an industry trade group. The defendants point out that
Congress “explicitly rejected the FCC’s request” to directly administer the E-
Rate program. While the United States now argues that a decision that USAC
and the USF are not susceptible to FCA liability would lead to the FCC
administering the program directly and therefore be “contrary to efficient
administration,” decisions about the costs and benefits of government versus
private administration are for Congress to make, not this court. The money in
the USF is provided by private telecommunication providers because of a
mandatory contribution scheme established by the FCC and Congress.
Congress has not declared this a tax, and the origination of the bill in the
Senate undermines the argument that it is one. The executive has admitted
that including the USF in budget documents is for the purpose of being
“comprehensive,” not a claim that these are clearly federal funds. The district
court in Lyttle rejected the identical arguments raised here because the
government could not defend its position that there was any “economic loss to
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                                No. 13-40807
the United States Treasury,” the original purpose of the statute. 2012 WL
6738242, at *21. The logic of the Supreme Court’s unanimous opinion in
Allison Engine rejects a broad reading of the FCA (because of its language or
any reliance on its legislative history) and supports the approach taken in
Totten. 553 U.S. at 667-68. If Congress had wanted the FCA to apply to the
USAC and the USF, it could have made it clear in § 3729 or administered these
funds through a governmental entity.
      Accordingly, that the FCC maintains regulatory supervision over the E-
Rate program does not affect the Congress’ decision, embodied in the program’s
independent structure, to externalize the cost of administering the program to
a private entity. 47 C.F.R. § 54.701(a). Because there are no federal funds
involved in the program, and USAC is not itself a government entity, we agree
that the Government does not “provide[] any portion of” the requested money
under the FCA. § 3729(c) (2008).
                              CONCLUSION
      For the foregoing reasons, we REVERSE the judgment of the district
court and REMAND for further proceedings.




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