0985 Risk Control

Module 5: Intellectual Property &

Reputation Risk

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 Course Plan
Module Titles
Module 1: Introduction to Risk Assessment and Treatment
Module 2: Root Cause Analysis
Module 3: Business Continuity Management
Module 4: Physical Property Risk
Current Focus: Module 5: Intellectual Property and Reputation Risk
Module 6: Legal and Regulatory Risk
Module 7: Management Liability & Human Resources Risk
Module 8: Environmental Risk
Module 9: Crime and Cyber Risk
Module 10: Fleet Risk
Module 11: Smart Products and Risk Management
Final Exam

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 Learning Outcomes

1. Use the nature of and types of intellectual property to

manage risk.
2. Apply risk control methods to copyright, trademarks,
patents, and trade secrets.
3. Use various methods for evaluating intellectual property.
4. Apply a risk management process for reputational risk.

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• 5.1 Intellectual Property Risk
• 5.2 Trademarks
• 5.3 Patents
• 5.4 Trade Secrets
• 5.5 Valuing Intellectual Property
• 5.6 Reputation Risk

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 Module 5 – Section 1

Intellectual Property Risk

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Intellectual Property Risk
• Intellectual Property
– Organization’s most critical asset
– Economic value = Right to exclude others from use or receive
compensation
– Need inventory of organization’s intellectual property and strategies
– Recognize intellectual rights of others
– Avoid infringement against rights of others

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Intellectual Property Risk (cont’d)
• Nature of Intellectual Property Protection
– Statutes, regulations, case law
– Patent Cooperation Treaty
• Reciprocal rights of protection with most countries
– Berne Convention
• Governs copyrights in most countries
– Paris Convention
• First international treaty that helped one country’s people gain
protection in other countries for their intellectual property

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Intellectual Property Risk (cont’d)
• Types of Intellectual Property Protection
– Copyright
• Legal right to exclusively own and control original written document, music,
software, sculpture, video, etc.
• Does not protect ideas or underlying concepts
– Trademark
• Legal right to own and control design or set of words that identifies a product or
service
• Creates a distinction of products or services
– Patent
• Legal right to own and control new, useful, nonobvious invention
– Trade secret
• Practice, method, process, design to gain advantage
• Owner takes reasonable steps to maintain secret

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Copyright Features
– Creation
• Must be original
• Fixed in a tangible medium of expression, permanently recorded
- paper, video/audio tape, digital media
• Some degree of creativity
– Ownership
• Who owns copyright? Employer or organization
• Belongs to author unless
– Created in course of employment
– Created on commission (work for hire)
– Sale of copyright by author

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Copyright Features (cont’d)
• Duration of copyright
– Depends on date of original work creation
– If created on or after January 1, 1978, work is
automatically protected from moment of inception and
given a term that lasts for the author’s life plus 70 years
more after author’s death
– If it’s a joint work (2 or more authors), term lasts for 70
years after last surviving author’s death.
– For hired works (or anonymous), it’s 95 years from
publication or 120 years from creation, whichever is less.

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Copyrights – New Legislation in Canada
• The Copyright Modernization Act received Royal Assent in June 2012, and numerous
sections were proclaimed in force in November 2012. Among the highlights of the
numerous and complex changes to Canada's Copyright Act effected are:

• This enactment amends the Copyright Act to

(a) update the rights and protections of copyright owners to better address the
challenges and opportunities of the Internet, so as to be in line with international
standards;
(b) clarify Internet service providers’ liability and make the enabling of online
copyright infringement itself an infringement of copyright;
(c) permit businesses, educators and libraries to make greater use of copyright
material in digital form;
(d) allow educators and students to make greater use of copyright material;
(e) permit certain uses of copyright material by consumers;
(f) give photographers the same rights as other creators;
(g) ensure that it remains technologically neutral; and
(h) mandate its review by Parliament every five years.

Source http://laws-lois.justice.gc.ca/eng/annualstatutes/2012_20/page-1.html

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Copyright
Risk Control Measures for Copyright Loss Exposures
• Notice
“© University of Toronto”, followed by year work was published, and name (U of T).
– Innocent infringement, damages paid = economic value of use
– Order to cease infringement
– Internet publication - difficult to assert control
– Digital watermarking – imbeds copyright information
– Assess potential infringement of other’s copyrights
• Registration
– Canadian Intellectual Property Office (CIPO-40th anniversary), US Copyright Office, or
the appropriate foreign body
– Must file within 3 months of publication or infringement
– Provides evidence of ownership rights
– Can collect damages without proving actual monetary harm

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Copyright (cont’d)
Risk Control Measures
• Restrictive covenants
– Restriction on activities of ex-employee or contractor
– Reduce the likelihood of infringement
• Responses to anticipated defenses
– Laches: waiting too long to assert a legal right
– Fair use doctrine: teaching, research, scholarship, criticism, journalism
(should obtain permission from copyright owner before using)
– Innocent infringement: cease and pay economic value of material
• Licensing agreements
– The copyright owner (licensor) specifies exact material to be used, type of
use and duration

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Module 5 – Section 2

Trademarks

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Trademarks
• Word, phrase or logo that identifies particular product
• Trade dress; total image of the product
• Examples:

Photo Credit Photo Credit

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Features of Trademarks
• Categories
– Arbitrary mark - appears to be random
• Hush Puppy Shoes
– Fanciful mark - conjures up an image
• Canada Goose
– Suggestive mark - implies certain qualities,
• Bite-no-More insect repellent
– Descriptive mark - describes the product
• Luxury Limo Service

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Features of Trademarks (cont’d)
• Creation – must be distinctive
– Unique symbol or logo, example,
– Fabricated word, example, “Canadian Tire”
– Word unexpected in context used, example, “Payroll
Factory”
– Word creates fanciful image, example, “Spring Meadow
Ice Cream”
– Word describes product’s qualities, example, “Slim Fast
Diet Shake”

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Features of Trademarks (cont’d)
• Creation – must be distinctive
– “A-1 Auto” not distinctive, no trademark
– Words with long term usage can be trademarked
because public associates word with the product,
example, “Harvey’s”
– Must be first to introduce mark or first to file intent to use
• Duration
– 10 years (20 if registered before Nov. 16, 1989)
– Lasts indefinitely if renewed every ten years

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Trademarks (cont’d)
Risk Control Measures
• Notice
– ®™
– symbol puts all on notice that mark is registered
• Registration
– ® only if registered with USPTO or Canadian Business Development
Centre (BDC)
– Creates presumption that registrant is owner
– Nationwide notice
– Due to shorter protection period should diary 10 year renewal dates
– Document when mark first used and continued use
• Searches and watches
– Alert for possible conflicting applications and registrations

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Trademarks (cont’d)
Risk Control Measures
• Restrictive covenants
– Restriction on activities of other party
– Reduce the likelihood of infringement
– Acknowledgement of non-innocent infringement
– Stipulate use of mark, type and amount of damages
• Enforcement of rights
– Timely dealing: cease and desist letter or intent to sue

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Trademark Disputes
• London Drugs Limited vs International Clothiers Inc

• London Drugs, a well known Canadian drugstore chain, owns various

trademark registrations which incorporate the term LONDON. It
appealed a decision of the Opposition Board that allowed applications
for the trademark SMITH & BARNES LONDON, covering a variety of
retail store services and related wares.

• In assessing confusion, the Federal Court rejected the argument that a

trademark incorporating a geographic term may be distinctive where it is
used on wares or services that have no pre-existing connection to the
designation. It noted that the distinctiveness of a mark has to do with its
originality, uniqueness and inventiveness, not with the absence of
deception. Geographic designations, such as LONDON, are not
inherently distinctive, and should not be accorded a high degree of
protection unless they have acquired distinctiveness over time. The
Court upheld the Board’s decision and rejected the appeal.

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Trademark Disputes (cont’d)
• When Microsoft's Canadian lawyers discovered Rowe's Web site, they told him
that he was infringing on Microsoft's trademark and demanded that he transfer
the domain in exchange for $10, the cost of his registration fee. Rowe refused,
because he liked the domain name and had spent money starting his Web
design business, so he asked for $10,000 to "cover his costs" and contacted the
press. Last week, Rowe's story was published all over the world, and Microsoft's
press relations machine eventually said it had taken the matter too seriously.

• In the end, Microsoft and Mike Rowe came to an agreement. In exchange for
transferring control of his domain name, the software maker has promised to
help Rowe set up a new Web site; pay for a Microsoft certification course and
subscription to the Microsoft Developer Network Web site; and pay for his family
to visit Microsoft Research Tech Fest in Redmond, Wash., in March. To top it all
off, he will get an Xbox with some games.

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 Review Questions
1. Intellectual property is best described as the product of
a. human intelligence that has social value.
b. artificial intelligence that has social value.
c. human intelligence that has economic value.
d. artificial intelligence that has economic value.

2. What is the legal definition of a patent?

a. The legal right to own and a control new, non-obvious invention.
b. A legal practice, method, process, or design to gain an advantage.
c. The legal right to own and control a design or set of words that identifies a product or service.
d. A legal right to exclusively own and control an original written document, music, software, or
sculpture.

3. Which of the following categories best exemplifies the trademark “Hush Puppy
Shoes”?
a. Fanciful mark
b. Arbitrary mark
c. Suggestive mark
d. Descriptive mark

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Module 5 – Section 3

Patents

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Features of Patents
• Ability to control who makes, uses, sells or imports invention
• Period of protection depends on category of patent
• Utility patent
– Invention or process with some utility or usefulness
– Invention must work, not necessarily marketable
• Design patent
– Ornamental feature of a product
• Plant patent
– New biological asexually reproducing plant

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Patents (cont’d)
• Patent creation
– Each country is different with respect to type of patent and duration
– Application must be made
– Invention must be new, useful and non-obvious
– Patent search and filings with USPTO
– ‘Patent pending’ during 3 year processing period
• Patent ownership
– Filed in owner’s name
– “Invent for hire’ agreement with employer
• Patent duration
– Utility: 20 years from application date
– Design: 14 years from date of issuance
– Plant: 17 years from date of issuance

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Patents (cont’d)
• Risk Control Measures for Patent Loss Exposures
– Notice
• ‘Patent pending’ during application
• Patent number after patent issued
• Willful/Intentional infringement >> Treble damages
– Licensing agreements
• Contract should transfer risk of infringement to the licensee or buyer
• Hold harmless agreements
– Restrictive covenants
• Employees: work for hire, hire to invent, confidentiality
• Terms of intellectual property covered by contract
• Full disclosure: discoveries, inventions, improvements, ideas
– Freedom to operate search
• Review prior art and current patent applications to ensure no willful infringement

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 Apotex Loses Patent
Case Against Merck
• On April 14, 2016, the Supreme Court of Canada denied Apotex’s
final attempt at obtaining leave to appeal in the storied patent
battle between Merck and Apotex over Merck’s lovastatin patent.
• The case began in 1997 when Apotex launched its generic
lovastatin product. At the liability trial in 2010, Justice Judith
Snider of the Federal Court found Merck’s lovastatin patent to be
valid and infringed (2010 FC 1265). The judgment included
reference to DNA evidence establishing that Apotex had infringed
through its operations in Winnipeg. The Judge also found that
Apotex’s joint venture partner fabricated batch records and
testimony regarding how the lovastatin was made. The Federal
Court of Appeal affirmed the Trial Judge’s ruling (2011 FCA 363),
and Apotex’s application for leave to appeal to the Supreme
Court was dismissed.

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 Apotex Loses Patent Case Against Merck (cont’d)

•In the subsequent damages trial, Justice Judith Snider ordered

Apotex to pay over $180 million in compensatory damages and
interest (2013 FC 751); the largest reported Canadian damages
award for patent infringement.
•Apotex’s appeal was later dismissed, in 2015, by a unanimous
panel of the Federal Court of Appeal (2015 FCA 171). This decision
is important for a number of reasons. For example, the so-called
“non-infringing alternative” defence was recognized in Canada for
the first time; however, Apotex was unable to support it on the facts.
For more information on this appellate ruling see our previous blog.
•On April 14, 2016, the Supreme Court of
Canada dismissed Apotex’s applications for leave to appeal. This
ruling represents the final chapter in an almost 20 year-old patent
case.
•McCarthy Tétrault was counsel to Merck throughout, at all trials
and appeals
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 Pfizer & the Viagra™ patent

• June 11 2013
• Close to seven months after rendering its decision in Teva Canada Ltd v Pfizer Canada
Inc., 2012 SCC 60, the Supreme Court of Canada varied its decision on Tuesday, June 4,
2013, to remove all references to the Sildenafil patent being "invalid" or "void". Instead
the Court decided to affirm Teva's allegation of invalidity of the Viagra™ patent pursuant
to the Patented Medicines (Notice of Compliance) Regulations ("PM(NOC) Regulations").
The distinction between whether an allegation of invalidity is justified under the Patent Act
versus a declaration of invalidity pursuant to the PM(NOC) Regulations, while subtle, is
material.
• Last November, the Supreme Court declared Pfizer's patent on Sildenafil (the active
ingredient in Viagra™) invalid for insufficient disclosure contrary to section 27(3) of the
Patent Act despite the proceedings having been brought under the PM(NOC)
Regulations. In voiding the patent, there has been some debate as to whether the Court
"accidentally" granted a remedy that exceeded its jurisdiction

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Module 5- Section 4

Trade Secrets

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Trade Secrets
• Features of Trade Secrets
– Instead of disclosure in patent application, use traded
secret
– Risk of reverse engineering
• Dismantling product to discover secret
• If product can be dismantled, use patent protection
– Loss of trade secret if someone else patents the item
– Trade secret can be stolen or disclosed

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Trade Secrets (cont’d)
• Creation
– No formal process of creation
– Treatment of information as ‘Secret’
– Courts answer questions to determine trade secret status:
• How well is secret known outside the business that owns secret?
• How much of the secret is disclosed to employees?
• What steps are taken to protect the secret?
• What is the secret’s commercial value?
• How difficult for someone to acquire/duplicate the secret?

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Trade Secrets (cont’d)
• Duration
– As long as secret can be maintained
• Loss exposures
– Honest re-creation by another entity
– Theft or disclosure through negligence
• Risk Control Measures
– Disclose information to employees on need to know basis
– Sign-in procedures to sensitive areas
– “Confidential” stamp or burn bag instead of shredder
– Confidentiality agreements and employment contracts
– Non-disclosure agreements with business partners

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 Module 5 – Section 5

Valuing Intellectual Property

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Valuing Intellectual Property (cont’d)
• Features
– Not easily inventoried or quantified
– Among organization’s most valuable commodities
• Greatest distinction from competitors
• Most durable impression in customers' minds
• Protection: copyright, trademark, patent, trade secret
• Information and ideas with respect to protection and value
• Important to identity, market share, competitive strategies, worth

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Valuing Intellectual Property (cont’d)
• Reasons for valuing intellectual property
– Technology makes infringement easy to be stored & transmitted
– Monetary value is necessary for quantification of damages and litigation
– Revenue generation through sale or license of use
– Mergers and acquisitions with respect to acquisition of intellectual property
• Need to determine true value of intellectual property
• Target organization
– Extent they sold or licensed intellectual property
– How well protected and ownership
– Use of intellectual property as collateral for financing or securitization
– Different accounting and taxation treatment
– Portion of risk management resources devoted to intellectual property

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Valuing Intellectual Property (cont’d)
• Valuation methodologies
– Fair market value – value on open market
– Income approach – most prevalent
• Current value assigned to piece of intellectual property based on the
discounted cash flow property generates over its useful life.
– Valuation Methodologies - Risk factors
– Discount rate can be adjusted based on
• Technology changes or regulatory risk
• Threats to value of the property can be factored in
• Prioritize resources to counter risks
– Cost approach
• Amount invested in creation and development of the property

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 Review Questions
1. Which of the following examples best describes a design patent?
a. Chemical compound
b. Article of manufacturing
c. Ornamental features of a product
d. New biological asexually reproducing plant

2. What is an example of restrictive covenants?

a. Hold harmless agreements
b. Patents that are pending during application
c. Terms of intellectual property that are covered by a contract
d. Current patent applications to ensure no willful infringements

3. Suitable protection for a product’s secret that can be deduced by reverse

engineering is a
a. notice.
b. patent.
c. trademark.
d. licensing agreement.

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Module 5 – Section 6

Reputation Risk

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 Reputation Risk

• Examples:
– Maple Leaf Foods listeriosis outbreak
– Refer to Maple Leaf Foods: The Listeriosis Crisis
• http://cinwal.blogspot.ca/2013/02/safety-at-maple-leaf-foods.html
• Maple Leaf Foods maintained their good name despite the problems
and negative attention they encountered.

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Reputation Risk (cont’d)
• Features
– Intangible assets can be more than one-half to three-
quarters of a company’s total value
– Reputation
• Key determinant of future business prospects
• Based on behaviors and opinions of stakeholders
• Comparison between experience and expectations
• Good reputation will exceed stakeholder expectations
• Bad reputation will fail to meet stakeholder expectations
• Earn and retain trust and confidence
• Differentiate organization and gain competitive advantage

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Reputation Risk (cont’d)
• Reputation as a key asset
• Goodwill reserve or reputational equity
• Potential to generate or erode future value
• Intangible asset but not quantifiable
• Need to manage stakeholder expectations
– Identify key stakeholders and prioritize them
– Internal – management, board, employees
– External – shareholders, suppliers, customers, regulators

Keep Maximum
Informed Efforts
Interest

Minimum Keep
Efforts Satisfied

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Power
Reputation Risk (cont’d)
• Key risk sources
– Downside – legal, regulatory non-compliance, unethical behavior,
major lawsuit
– Upside – leveraging opportunities to enhance reputation
• Shifts in the competitive marketplace
• Environmental concerns >> rise of ‘green’
technologies

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Reputation Risk (cont’d)
• Key Drivers of Reputation and Sources of Risk grouped
around 3 ethical dimensions:
– Goals and mission
• Financial performance and long term investment value
• Business activities aligned with objectives
• Senior management responsible for setting strategic plan
– Rules (Laws and Regulations)
• Corporate governance and leadership
• Corporate social responsibility
• Regulatory and legal compliance

– Values (Internal Forces)

• Deliver on customer promise
• Workplace talent and culture
• Communications and crisis management

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Reputation Risk (cont’d)
• Systemic approach to managing reputation risk
• The Essential Triangle
– Use of transparent business practices and good governance
– Periodic messages to shareholders about decision making,
partnering and acquisitions
– Managing interactions with general public, stakeholders, employees

The organization

Message Stakeholder
expectations

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Reputation Risk (cont’d)
• Systematic approach to managing reputation risk
• Ethical dimensions
– Goals and mission - daily activities aligned with goals and mission
– Rules (laws and regulations) – compliance with applicable laws
– Values (internal forces) – consistent with strategic plan
• Reputational risk management
– Recognize a risk to reputation
– Make decisions rapidly to manage the risk
– Company leadership and culture play key roles

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Reputation Risk (cont’d)
Principles used for Implementation of risk management for
reputation risk:
• Identify, evaluate, prioritize reputational risk
– Identify key drivers and consequences
• Develop and implement risk responses
– Identify source of risk
– Threat or opportunity?
– Organization's risk appetite
– Treatability of the risk
– Cost of treatment
• Monitor and report
– After risk response, monitor for early risk detection/ immediate action
– Monitor for any changes in risk

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Reputation Risk (cont’d)
• Implementation of risk management reputation risk
• Clearly define roles and responsibilities
• This begins with CEO, board of directors, and
stakeholders
• Barriers to success with respect to lack of: clarity,
resources, awareness of true value of reputation

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 Review Questions

1. Reputation risk, an intangible risk representing more than

one-half of a company’s total value is based on
a. its potential to erode present value.
b. past determinants of business ventures.
c. behaviours and opinions of stakeholders.
d. quantifying a company’s financial statements.

2. What are the three key drivers of reputation risk?

a. Missions, rules and values
b. Employee retention, goals, and values
c. Goals, remediation practices, and missions
d. Rules, laws, and adherence to strict liability

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Any questions?

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Thank You
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School of Continuing Studies

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