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Top Canadian Legal Issues for Brands & Hospitality Companies (Legal Issues You Might Not Know About Canada)
Similarly to the United States, Canada has pre-sale franchise disclosure laws in six of the 10 provinces in the country, each of which require that a “franchise disclosure document” or “FDD” be provided to a prospective franchisee at least 14 days before a franchise agreement is signed or any consideration is paid in respect of the franchise. Due to the broad application of franchise laws, certain relationships, including licensed or managed hotel arrangements, may be considered “franchises” under Canadian law, even if not so intended as such or characterised under American law. Consequences for failures or errors of disclosure include statutory misrepresentation and rescission, including the right to sue for losses. Canadian franchise laws are historically strictly construed against franchisors, with case law supporting large damage awards against hotel franchisors because of technical errors in disclosure. While the substance of disclosure is relatively similar in both countries, Canadian disclosure obligations include an overriding “materiality” concept which can require a FDD to be modified on a deal-by-deal basis to account for deal-specific facts, including, in some instances, the content of a PIP, as well as an ongoing disclosure obligations in respect of “material changes” between the provision of the FDD and the execution of a franchise agreement. Certain exemptions exist from the obligation to make disclosure, including in Ontario and British Columbia, where the acquisition of the franchise exceeds $5M.
NO “AT-WILL” EMPLOYMENT IN CANADA
There is no “at-will” employment in Canada. No Canadian employer has the ability to terminate a Canadian employee’s employment at any time without cause and without notice, except within the first three months of an employee’s employment (provided the employer has reserved that right, in writing, when it offers employment to be able to exercise it).
Employers have an implied duty of good faith and fair dealing with their employees. Consistent with this is the implied obligation to provide an employee with “reasonable notice” of termination of employment where there exists no “cause”. This entitlement can trigger substantial severance payments and is one of the key reasons that Canadian employers typically enter into formal written employment agreements with their employees.
While employers are permitted to terminate employees’ employment without notice for cause, cause has a very high threshold under a Canadian law. Under employment standards legislation in every Canadian jurisdiction, written notice of termination or pay in lieu of notice is required for the termination without cause of any employee with three months’ service or more. The statutory requirements vary across the country, but generally equal roughly a week of notice or pay in lieu for each year of service to a maximum of eight weeks.
Employment standards legislation cannot be contracted out of; attempts to do so are deemed void. The Supreme Court of Canada has set aside an employment agreement where the employee agreed no notice of termination was required. In that case, the Court required the employer to pay an amount consistent with the common law obligation to provide reasonable notice (which is typically much greater than the minimum imposed by employment standards legislation).
The common law obligation to provide reasonable notice is based on a number of factors such as age, length of service, position performed, and prospects for securing alternate, comparable employment. While there is no “rule of thumb”, awards of one month per year of service, and more, are commonplace in Canada.
Reasonable notice generally includes not just pay, but benefits, commissions, most incentives or bonus, pension, deferred payments, car allowances, continued stock option vesting, etc. The employer is required to keep the employee “whole” for the period of reasonable notice and, if paying in lieu, is required to maintain all of the compensation and benefits associated with the employment relationship, unless there is very careful drafting in the applicable plan to prevent this.
As of October 17, 2018, it has been legal to cultivate, posses, acquire and consume cannabis and cannabis products across Canada. Permitted products include cannabis and cannabis accessories, but excluded, until October 17, 2019, “edibles” and other cannabis-infused products, such beverages and vaporizers. The legal framework which regulates cannabis consists of federal, provincial and municipal laws and regulations. Federal legislation focuses on public health and safety, with jurisdiction over such things as production licensing, packaging, labelling and promotion and taxation. Provincial legislation focuses on distribution, retail, as well as setting rules regarding where individuals may smoke cannabis. The decentralization of jurisdiction to the provinces has created a lack of uniformity across the country. For instance, consumption in public areas is prohibited in some provinces, while others, like Ontario, permit consumption anywhere tobacco smoking is permitted, with certain exemptions (such as vehicles or where children frequent). Certain provinces, like Alberta, have created rules to permit (at a later date) the regulation of consumption spaces (such as lounges or cafes), while others have not. In Ontario, British Columbia, and other provinces, cannabis can be smoked in designated guest rooms in hotels, motels and inns. Local or municipal governments may impose further restrictions which could limit provincial rules.
DESTINATION MARKETING FEE LITIGATION – KNUTH V. BEST WESTERN ET AL…
In Canada, destination marketing programs have been established by local tourism authorities, hotel associations or other bodies, for the purpose of promoting tourism in a particular city or region. These programs raise money for their promotional activities by soliciting hotels and other tourist service providers to remit a percentage or fixed amount of their revenues to the marketing program. These contributions may be funded by the hotels in whatever manner they see fit, but usually take the form of a percentage surcharge on the quoted room rate; surcharges, referred to as Destination Marketing Fees (“DMF”), are collected voluntarily by the hotels, and have no statutory basis.
DMFs are distinguished from lodging or accommodation taxes which are also levied in some provinces over and above applicable sales taxes. These are collected and remitted to provincial authorities. Generally, municipalities in Canada lack the authority to levy local taxes on hotel rooms.
In Canada, a consumer must be provided with clear, unambiguous notice of the DMF prior to the consumer entering into the agreement, particularly as the consumer will use the pricing information to determine if he or she will enter into the agreement. The DMF must be disclosed as a separate item/charge and must not be combined with applicable taxes or any other amounts payable by the consumer.
In the ongoing case of Knuth v. Best Western et al, the plaintiff made claims based on, among other things, the following:
- the characterization (during the booking process on the hotel website) of a DMF as a tax, and
- misleading or incorrect disclosure (during the booking process on the hotel website) of the DMF or the applicable tax.
In many instances the website/software platforms being used by certain hotels could not easily set out the DMF on a separate line at the point of booking. In some instances, it is claimed that the DMF was included with the tax giving the appearance of taxes being charged in excess of the applicable rate. Further many systems could not charge the correct tax on the full room rate such that the tax was on top of the DMF.
By way of update, certain of the franchisors in the action brought a motion for summary judgement to have the action dismissed against them on the basis that they are not liable for the actions of their franchisees. In August 2019, the Court dismissed the summary judgement motion. It is expected that the next major step will be certification as a class action.
LOYALTY PROGRAM LAW UPDATE
There are recently-enacted laws in Ontario (January 2018) and Quebec (August 2019) regulating loyalty programs. Subject to prescribed exceptions, the new laws prohibit the expiry of reward points due to the passage of time alone.
The key exceptions include:
- if the customer has not earned or redeemed any points within a specified period, and such expiration is provided for in the agreement (note that in Quebec, the inactivity must last at least one year)
- rewards for a specific good or service identified at the outset (e.g. coffee stamp card)
- gratuitous points
It is anticipated that other Canadian jurisdictions will adopt similar loyalty specific legislation in the coming years.
CANADA’S ANTI-SPAM LEGISLATION (“CASL”)
In Canada, there are disclosure and consent requirements for the sending of a commercial electronic message (“CEM”). The sender must obtain explicit opt-in consent unless implied consent or an exception applies. This differs from the US “opt-out” model. The key exception is where there is an existing business relationship within a 2-year period immediately preceding sending of the CEM.
There are requirements for every CEM delivered, including:
- the contact information of the sender must be included in the CEM
- the CEM must provide an unsubscribe mechanism that is capable of being readily performed and is clear and prominent
- the sender must retain a clear and comprehensive record of opt-in/opt-out
MERGERS & ACQUISITIONS
Acquisitions of US hotels are almost always completed as asset deals unless there is a specific reason that an entity deal must be utilized. While asset deals are common in Canada, entity deals are sometimes utilized to take advantage of the lifetimes capital gains exemption. The exemption allows a Canadian individual who holds shares of a qualified small business corporation to a lifetime capital gains exemption equal to approximately CAD $850,000. There are a number of requirements in order to take advantage of this exemption including that the shares were held for a minimum of 2 years, the corporation was a Canadian-controlled private corporation, and that the corporation had during such time “active” business income. Further, land transfer tax is not payable in connection with a transfer of shares of a corporation but is payable on a transfer of assets which is further incentive to structure as a share deal.
Partner and Co-chair, Hospitality Group Cassels Brock & Blackwell LLP
Partner and Co-chair, Hospitality Group Cassels Brock & Blackwell LLP
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California Employers Are Not Required To Reimburse Restaurant Workers For The Cost Of Slip-Resistant Shoes Under Labor Code Section 2802
A recent California Court of Appeal decision, Townley v. BJ’s Restaurants, Inc., has further defined the scope of reimbursable business expenses under California Labor Code section 2802, this time in the context of slip-resistant shoes for restaurant workers.
A former server filed an action under the California Labor Code Private Attorneys General Act of 2004 (PAGA), seeking civil penalties on behalf of herself and other “aggrieved employees” for California Labor Code violations, including the failure to reimburse the cost of slip-resistant shoes. Plaintiff alleged a violation of Labor Code section 2802, which requires an employer to reimburse employees for all necessary expenditures incurred by the employee in direct consequence of the discharge of their duties.
Plaintiff argued that, because the restaurant required employees to wear slip-resistant, black, closed-toes shoes for safety reasons, such shoes should be provided free of cost or employees should be reimbursed for their cost.
The Court of Appeal, persuaded by the reasoning in an unpublished Ninth Circuit Court of Appeals decision, Lemus v. Denny’s, Inc., and guidance from the California’s Division of Labor Standards Enforcement (DLSE), held that section 2802 did not require the restaurant employer to reimburse its employees for the cost of slip-resistant shoes. Specifically, the Court held that the cost of shoes does not qualify as a “necessary expenditure” under section 2802.
In reaching its decision, the Court followed the reasoning in Lemus, citing a DLSE opinion letter, “The definition and [DLSE] enforcement policy is sufficiently flexible to allow the employer to specify basic wardrobe items which are usual and generally usable in the occupation, such as white shirts, dark pants and black shoes and belts, all of unspecified design, without requiring the employer to furnish such items. If a required black or white uniform or accessory does not meet the test of being generally usable in the occupation the [employee] may not be required to pay for it.”
Here, the plaintiff did not argue that the slip-resistant shoes were part of a “uniform” or were not usual and generally usable in the restaurant occupation. The restaurant did not require employees to purchase a specific brand, style, or design of shoes and did not prohibit employees from wearing their shoes outside of work.
Under California law, a restaurant employer must pay for its employees’ work clothing if the clothing is a “uniform” or if the clothing qualifies as certain protective apparel regulated by OSHA or California’s Division of Occupational Safety and Health (Cal/OSHA). Labor Code and Industrial Welfare Commission Wage Order No. 5-2001, governs the public housekeeping industry, including restaurants. Under Wage Order No. 5, uniforms must be provided and maintained by the employer when the uniforms are required by the employer to be worn by the employee as a condition of employment. “Uniform” includes “wearing apparel and accessories of distinctive design or color.” This section of the wage order specifically does not apply to protective equipment and safety devices regulated by the Occupational Safety and Health Standards Board.
On appeal, the plaintiff abandoned her alternative theory of liability that reimbursement was owed under provisions of Cal/OSHA, Labor Code sections 6401 and 6403, which require employers to furnish and provide safety equipment to employees.
The trial court had held that OSHA and Cal/OSHA provide than an employer is not required to reimburse employees for the cost of non-specialty shoes that offer slip-resistant characteristics, but are otherwise ordinary clothing in nature. However, the Court of Appeal ultimately did not decide the applicability of OSHA or Cal/OSHA. Likewise, the Ninth Circuit in Lemus v. Denny’s, Inc. did not address whether Cal/OSHA requires reimbursement of slip-resistant footwear.
After the decision in Townley, there remains a question of whether reimbursement for the cost of slip-resistant shoes could be required under Cal/OSHA for safety reasons. Under Federal OSHA regulations, employers must generally provide personal protective equipment at no cost to the employee. The regulation specifically includes an exemption for non-specialty safety-toe protective footwear, which the employer permits to be worn off the job-site. Employers are also not required to pay for everyday clothing, including street shoes and normal work boots. Under California law, if protective equipment is required by Cal/OSHA, the employer is responsible for paying for the safety equipment. There is no Cal/OSHA regulation equivalent to the Federal exemption for generic non-specialty shoes. While California employers have argued (and the trial court in Townley concluded) that the Federal exemption should control in California, the California Court of Appeal and Ninth Circuit have so far left that question unanswered.
Although we now have clarity that California Labor Code section 2802 does not require reimbursement of the cost of slip-resistant footwear, there remains the question of whether such footwear could constitute reimbursable protective equipment under Cal/OSHA safety standards. Although Townley and the Federal OSHA exemption provide some guidance for California employers, they are reminded that neither are necessarily binding or precedential. As such, it will be important for employers to track California caselaw in this area, as well as look out for Cal/OSHA guidance. In the meantime, employers are encouraged to periodically review their policies and practices for reimbursing employee business expenses to ensure compliance with California law, including Cal/OSHA regulations.
New Jersey recently enacted legislation that requires hotels with at least 100 guest rooms to provide panic devices to certain employees. The purpose of the Panic Device Law is to protect hotel employees, often required to clean and cater to rooms on their own, from sexual assault, sexual harassment, and other unsafe working conditions. It also intended to empower hotel employees who may have previously felt helpless and reluctant to report inappropriate conduct due to concerns of retaliation from their employers.
While New Jersey is the first state to enact such a law, which will go into effect in January 2020, it follows a growing trend in cities throughout the country – particularly in Chicago, Miami, Sacramento, and Seattle – that have seen the passage of ordinances requiring panic devices for certain hotel employees, among other protections. Other cities, such as Las Vegas and New York City, have seen the introduction of panic devices in the wake of union negotiations. The introduction of panic devices will likely go beyond major metropolitan areas, however, as executives at some of the largest hotels have reportedly revealed their plans to provide panic buttons to their employees across the country by 2020.
If you have operations in New Jersey, you need to immediately familiarize yourself with this new law and take compliance steps. And if you don’t have operations in the state or one of the other areas with such a law, you should still be aware of this trend, as it not only presents some concepts for best practices in a hotel setting, but may soon arrive in your own area.
Coverage And Scope
The New Jersey Panic Device Law defines hotel to include not just hotels, but also inns, boarding houses, motels, and other similar establishments that offer and accept payment in exchange for rooms, sleeping accommodations, or board and lodging and that retain rights of access and control over their premises. Regardless of the type of “hotel,” the establishment must also have at least 100 guest rooms in order to be subject to the Panic Device Law. If your business has fewer than 100 guest rooms, compliance with the Panic Device Law is unnecessary.
The Panic Device Law defines an employee as one who performs housekeeping and room service functions on a full or part-time basis at a hotel for, or under the direction of, a hotel employer or any subcontractor of the hotel employer. The law therefore covers and protects hotel employees, contractors, and subcontractors, sweeping them together under an expansive definition of an employee.
The definition of an employer is as broad or broader and includes any person, including corporate officers and executives, who directly, through an agent, or another person (e.g., a staffing agency) employs or exercises control over a hotel employee’s wages, hours, or working conditions. Awareness of and compliance with the Panic Device Law is thus essential by directors, managers, supervisors, and anyone else who may exercise sufficient control over hotel employees.
Provision And Use Of Panic Devices
Employers of covered hotels must provide employees that work in a guest room by themselves with a panic device. Employers are prohibited from charging employees for the panic device and must purchase and furnish them at their expense. The Panic Device Law defines a panic device as a two-way radio or other electronic device that can be used by the employee to call for immediate assistance from a security officer, manager, supervisor, or other appropriate person.
Employees are permitted to use their panic device whenever they believe there is ongoing crime, an immediate threat of assault or harassment, or some other emergency in their presence warranting the use of their panic device. Once used, employees may stop their work and leave the area for safety and assistance.
Employers’ Duties When A Panic Device Is Used
Employers are forbidden from taking adverse action against an employee for using a panic device. After a panic device is used, aside from promptly responding to the call, employers must also:
Note an accusation against a guest to for “violence” – which is broadly defined to include sexual assault, sexual harassment, and other inappropriate conduct – toward an employee and put the guest’s name on a list and retain it for five years from the date of the reported incident, along with details of the accusation.
Report any alleged crime by a guest or other person to law enforcement and cooperate in any investigation by law enforcement.
Reassign the employee who activated the panic device to a different work area away from the accused guest’s room for the duration of the accused guest’s stay.
Notify employees assigned to a guest room where a reported incident has occurred of the presence and location of the accused guest named on the hotel’s list and provide them with the option of servicing the accused guest’s room with a partner or declining to serve the accused guest’s room for the duration of the accused guest’s stay.
If an employer later learns that the accused guest is convicted of a crime as a result of the activation of a panic button, the employer may prohibit the guest from staying at the hotel.
Programs For Employees
Employers must develop and maintain programs to educate employees about the use of panic devices and their rights in the event they use their panic devices. The programs should also encourage employees to use their panic devices. Written information may supplement, but not substitute, training programs for employees.
Information For Guests
Covered hotels must also inform their guests about panic devices in one of two ways. They may either require guests to acknowledge a panic device policy as part of the terms and conditions of checking into a hotel, or they may prominently place a sign on the interior side of guest room doors, in large font, detailing their panic device policy and the rights of their employees.
Collective Bargaining Agreements
The Panic Device Law provides a carveout for collective bargaining agreements. If a collective bargaining agreement addresses the issuance of panic devices to hotel employees or addresses employee safety in guest rooms and the procedures for reporting questionable conduct, the collective bargaining agreement controls and hotel employers are not required to provide panic devices to employees.
Penalties For Noncompliance
Hotel employers who fail to provide panic devices or respond as required when a panic device is activated are subject to fines of $5,000 for the first violation and $10,000 for each subsequent violation. The fines are recoverable by the Commissioner of the New Jersey Department of Labor and Workforce Development.
Next Steps For Employers
Covered hotel employers in New Jersey that are not governed by a collective bargaining agreement should begin taking steps to comply with the Panic Device Law and watch for regulations promulgated by the Commissioner, particularly since the Panic Device Law grants the Commissioner with the authority to develop regulations to facilitate its implementation.
Covered hotel employers should budget for panic devices and obtain a sufficient number of them, develop employee training programs, and update your terms and conditions or create signs for guest rooms regarding their panic device policies. Covered hotel employers should likewise review their handbooks and other policies to ensure cohesion with the Panic Device Law.
Hotel employers outside of New Jersey and cities with similar ordinances should be on the lookout for the adoption of similar panic device measures in their localities—or for their inclusion in collective bargaining agreements, if they are not there already. The more widespread introduction of panic devices seems all the more probable in the #MeToo era.
The recent failure of the British holiday company Thomas Cook – which owned several airlines, including Thomas Cook Airlines (MT) – highlights how an airline’s financial distress and shutdown can cause serious disruptions for travelers. The scale and impacts of airline failures on travelers can vary depending on what steps the government in an airline’s home country is willing to take to assist affected travelers, but travelers can improve their chances of avoiding these challenging situations by knowing warning signs of an airline’s potential demise.
Signs of Airline Financial Trouble
The exact timing of an airline’s cessation of operations is very difficult to predict, but travelers can discern some obvious signs that an airline is in serious financial trouble. While almost all airlines experience financial losses periodically, reports of missed payments to suppliers or lessors, aircraft groundings, and airlines missing payroll are all indicators that an airline is undergoing severe financial distress that exceeds normal financial issues. Other signs that an airline’s future may be in jeopardy include financial problems with an airline’s parent company, the withdrawal of a major investor, or the breakdown of an attempt to sell the airline. It should be noted, however, that such issues do not indicate that an airline’s bankruptcy is inevitable, as some airlines have experienced these issues and recovered from their precarious financial situations.
Missed payments to suppliers, employees, lessors, and authorities are clear signs that an airline may not be able to maintain its operations. Ensuring such payments is a top priority for an airline’s leadership; missing payments can result in suppliers or airports denying service to an airline, which can cause flight cancellations and other operational disruptions. Lessors may also repossess aircraft from airlines that miss payments. If airlines fail to pay maintenance providers or become unable to afford spare parts, they may be forced to ground aircraft for safety reasons, another sign that an airline may be unable to continue operations for much longer.
Financial problems at an airline’s parent company or the withdrawal of a major investor can also jeopardize an airline’s operations. Notable examples of this trend include the shutdown of Belgian flag carrier Sabena (SN) in 2001 after its parent company Swissair (SR) collapsed, and the shutdown of major Australian carrier Ansett Australia (AN) in the same year amid financial challenges at parent company Air New Zealand (NZ). Air New Zealand ultimately survived the crisis, but Ansett did not. More recently, several subsidiaries of Abu Dhabi’s flag carrier Etihad Airways (EY) have experienced major financial difficulties as a result of their parent company’s challenges. While Etihad itself is highly unlikely to cease operations thanks to strong financial backing from Abu Dhabi’s government, its subsidiaries Darwin Airline (F7), Air Berlin (AB), Niki (HG), and Jet Airways (9W) have all ceased operations in the last three years after Etihad withdrew funding for the carriers.
Travelers should take special notice if an airline they are flying on stops selling tickets, or if a bid to secure a last-ditch loan or investment for the airline fails. While some airlines have gone through such situations and survived, most have ceased operations shortly afterward. Thomas Cook’s failure occurred immediately after a deal to secure additional investment in the company collapsed and the British government rejected the company’s bid for a last-second loan. French carrier XL Airways France (SE) announced Sept. 19 that it was suspending ticket sales; the carrier has indicated that it will cease operations in the coming days unless it can secure a rescue deal.
A country’s bankruptcy laws and a government’s ability to assist financially distressed airlines can also impact airline shutdowns. US law allows bankrupt airlines to continue operating without interruption while they reorganize. Many other countries, however, do not have laws allowing bankrupt businesses to continue operating. The lack of such a law in Switzerland played a major role in Swissair’s downfall in 2001. Some struggling airlines can also turn to their countries’ governments for assistance in maintaining operations in the face of financial challenges, especially if they are one of the country’s main airlines or are state-owned. Some governments, however, are unwilling or unable to assist ailing carriers. EU laws prohibiting governments from providing unfair aid to private companies have played a direct role in multiple airline shutdowns in the past two decades.
Operational and Travel Impacts of Airline Failures
The impacts of airline failures on passengers depend on how prepared authorities are for the shutdown. A well-organized civil aviation authority who is prepared for an airline to cease operations can often accommodate all passengers relatively quickly. An unexpected shutdown, however, can force passengers to fend for themselves, both for getting to their destinations and obtaining refunds for canceled flights.
Civil aviation authorities that know in advance an airline is likely to cease operations can provide significant assistance to passengers. The UK government was aware of Thomas Cook’s likely demise several days in advance and developed a plan to immediately assign almost all Thomas Cook passengers stranded abroad to alternative flights, including special charter flights that authorities had arranged in advance. The UK government followed a similar plan when Monarch Airlines (ZB) ceased operations in 2017. The German government took even more extreme steps when Air Berlin failed in 2017; the government provided the carrier with a loan that allowed it to continue operations for another two months before shutting down in a controlled manner. In cases where governments aid passengers after an airline ceases operations, most of a government’s efforts focus on repatriating passengers stranded abroad; such operations generally do not provide flights to passengers who have yet to start their trips.
Disorganized airline shutdowns can leave passengers on their own to arrange travel back home. When Spanish carrier Primera Air (PF) ceased operations in 2018, the carrier simply stopped all flights, withdrew all staff from airports, deactivated its email addresses and phone numbers, and told passengers to not contact the airline. Passengers who do not receive government-arranged flights after an airline shuts down should arrange alternative transportation as quickly as possible. Alternative flights tend to book quickly after an airline ceases operations, especially if the number of alternative flights is limited. In some instances, airlines will add extra flights or use larger aircraft to accommodate the surge in passengers from a competitor’s demise, but travelers should not count on this, especially in the first day or two after their carrier ceases operations.
A traveler’s ability to get compensation or refunds for their canceled flights after an airline ceases operation depends on local laws. Some airlines will offer passengers refunds immediately after they cease operations or offer to compensate a passenger for tickets bought on a different carrier. In some countries, however, passengers will simply become creditors for the bankrupt airline. In such instances, passengers generally are among the last to receive money from the sale of the bankrupt carrier’s assets, as secured creditors such as banks and other lenders receive priority over customers in most jurisdictions.
While the airline industry has experienced some of its most prosperous years, several large airlines have failed. As the global economic conditions that allowed airlines to thrive show signs of change, airline failures are likely to be more common, especially in several major markets including India, Indonesia, and Argentina. The more challenging economic environment, including rising oil costs and an increase in the number of low-cost carriers, is likely to put financial pressure on airlines. The impacts of airline failures can vary considerably depending on how authorities in the airline’s home country react.
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