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ISSUE 2010/02

MARCH 2010
bruegelpolicybrief

EUROPE SHOULD STOP


TAXING INNOVATION
by Bruno van Pottelsberghe SUMMARY The European Union failed to achieve its Lisbon agenda target of
Senior Fellow at Bruegel
Professor at the Université Libre de
spending three percent of GDP on research and development, and so, in the
Bruxelles EU2020 strategy, has given itself another decade to meet this goal.
bvp@bruegel.org
Meanwhile, the EU has been leapfrogged by China in terms of business R&D
spend. One key element to stimulate innovation and ultimately drive
European growth would be to create the long-awaited single EU patent.
Today’s fragmented European patent system is poor value for money and
overly complex, not least because national patent systems still have the
last word over all European patents on their territory. After nearly 50 years
of failure to create the EU patent, language issues and the design of a cen-
tralised patent litigation court remain unresolved. The recent EU Council
deal on an ‘enhanced’ European patent system is potentially a step forward,
though many problems remain unresolved.
POLICY CHALLENGE

The risk for Europe is that current moves result in a patent agreement that
does not cure the system of its major ills, and thus does not bring about
any significant improvement for those who need it most: entrepreneurs and
innovative companies starting out on the innovation process. The creation
of an effective single
Cost of patenting in major economies, €s
European patent requires i)
35,000
Renewal fees (up to 10th year)
English-only post-grant
30,000 Translation cost
translation, ii) the end of
Procedural cost
25,000
* EPO-13 (6) stands for a European
nationally granted patents,
20,000 patent validated in 13 (6) countries
iii) phasing-out of the current
15,000 ‘European patent’, iv) lower
10,000 fees for young innovative
5,000 companies, and v) a radical
0
shake-up of the governance
EPO-13* EPO-6* US Japan S. Korea Brazil China
of the European Patent Office.
Source: Bruegel based on van Pottelsberghe and Mejer (2008) and van
Pottelsberghe and François (2009). Figures refer to 2008.
EUROPE SHOULD STOP TAXING INNOVATION

PATENT SYSTEMS underpin eco- growth, it needs to sort out its patent system, but the
02 nomic growth. If a patent system
is suboptimal, it is a sure sign that
patent system fast. Until it does
so, Europe is effectively putting a
Commission president recognises
that Europe’s patent system is fail-
bruegelpolicybrief

research and development will be tax on innovation. ing to pull its weight, in particular
hampered and growth will be ham- because it is fragmented:
strung. A well-functioning patent Ten years ago the EU aspired to
system is a fundamental frame- invest three percent of its GDP in ‘There are some things in our
work condition to sustain the pace R&D by 2010. It still spends less strategy that you will have
of innovation and the distribution than two percent. Not only has heard before. We make no apol-
of its benefits both within and Europe’s R&D effort been flat-lin- ogy for that. They would not be
between countries1. ing for 20 years (see Figure 1a), here if they had been done
but Europe still lags far behind the properly in the last ten years. To
Europe has been working on its US and Japan on this score and is give some examples: it is not
patent system for more than 45 being leapfrogged by China, as acceptable that because we do
years and it is still a work in illustrated by business R&D spend not have a Community patent,
progress. Unnecessary expense (see Figure 1b). The trend sug- European companies face
and legal uncertainty still abound. gests that the relative situation translation costs of around
Yet these are the very two features will worsen for Europe. China has €3000 on each patent. It is thir-
that count the most for business, long had two decisive competitive teen times more expensive in
especially small and medium- advantages over Europe: its large the EU than in the US and eleven
sized companies. There is still no ‘single’ market and a low-cost but times more expensive than in
simple ‘one-stop-shop’ for compa- educated workforce. It is fast Japan’ (Barroso, 2010).
nies seeking Europe-wide patent acquiring a third one: its ability to
protection, and duplicate fees and innovate (see Figure 2 on the next True, the patent system is not the
administrative charges – not to page). only cause of Europe’s lack of
mention the burden of possibly inventive activity, but it is one of
multiple litigation – bloat the cost In its ‘Europe 2020’ strategy for the weakest links between
of patenting in Europe. The EU smart, sustainable and inclusive Europe’s still-strong scientific
faces increasing competition from growth – the successor to the EU’s base and its lack of knowledge-
China, Japan and the United States Lisbon agenda – the EU has rolled based entrepreneurship.
for scientific talent and R&D over the R&D spending target of
resources, and so if Europe is seri- three percent of GDP. Among the In December 2009, EU industry
ous about creating the right envi- factors that should spur greater ministers meeting in the
ronment for innovation and business R&D spending is the Competitiveness Council claimed

Figure 1: Asian progress, European stagnation


1a: R&D intensity of major economies, 1980-2007 1b: Business-funded R&D as a % of GDP
4.0% 3.0%
2000 2007
3.5%
Japan 2.5%
3.0%
US 2.0%
2.5%

2.0% 1.5%
EU15
1.5% EU27
1.0%
1.0%
China 0.5%
0.5%

1. For a detailed 0 0
Japan Korea United States EU27 EU15 China
1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

analysis, see van


Pottelsberghe (2009).
Source: OECD, MSTI, 2007-8. Figure 1a: gross expenditures on R&D as a percentage of GDP. Figure 1b: industry-financed GERD as a percentage of GDP.
EUROPE SHOULD STOP TAXING INNOVATION

to have, at last, overcome the


intractable problems that have
prevented the EU patent from
Figure 2: Evolution of patent applications at major patent offices
500,000 03

bruegelpolicybrief
450,000
becoming a reality2. Optimistic Japan
declarations were made about a 400,000

deal that would ‘make patenting 350,000


and innovating easier and more United States
300,000
affordable.’ Unfortunately, the evi-
250,000
dence seems to tilt towards a
200,000
rather less optimistic assessment
(see section 3). 150,000
Europe (EPO) China
100,000
This Policy Brief argues that 50,000
Europe needs more substantial
0
improvements to be made to its
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
patent system, including a radical
overhaul of its governance. Source: Bruegel based on annual reports of national patent offices.
Section 1 explains why and how a
patent system should sustain an But the European system is expen- system is especially detrimental
economy’s long-term competitive- sive. Once granted, a European to young innovative firms.
ness, and briefly summarises the patent can only be enforced at
weaknesses of the current sys- national level: it must be translat- 2 WHY NO EU PATENT AFTER
tem. Section 2 discusses the vari- ed into several languages and NEARLY 50 YEARS OF DEBATE?
ous reasons that might plausibly national validation fees and annu-
lie behind the nearly 50-year long al renewal fees must be paid. To Two official ‘fig-leaves’...
resistance to an EU patent3. this, for each fee payment, one 2. Meeting of 4
December 2009; see eg
Section 3 analyses the strengths must add the frequently compul- The ‘official’ reasons for the failure EurActiv, 7 December
and weaknesses of the measures sory national intermediation serv- to create an EU patent are related 2009, ‘Sweden claims
breakthrough on EU
agreed upon by industry ministers ices, whereby locally accredited to language and the centralised patent impasse’.
in December 2009. Section 4 con- patent attorneys interact with litigation system. On the language 3. In the remainder of
cludes and puts forward policy national patent offices (NPO) on question, the blockage comes this document we will
recommendations. behalf of the patent owner. Any from countries that refuse to allow use the new term ‘EU
patent’, not
subsequent enforcement issue is patents published in a foreign lan- ‘Community’ patent.The
1 A NECESSARY REFORM dealt with at the national level, guage to be enforced within their post-Lisbon Treaty ‘EU
patent’ project was for
with national jurisdictions having borders, arguing that this would nearly 50 years called
In order to work properly, a patent the ultimate power to decide on put local entrepreneurs at a major the ‘Community patent’.
system must, first, guarantee a the outcome of patent-related disadvantage compared to foreign But the key material
distinction to make is
sufficient level of quality in the litigation. competitors. So far, and whatever between the yet-to-be-
screening of applications by a the true merits of this argument, achieved Commmunity/
EU patent and the cur-
patent office and, second, be This fragmented system, if one can no agreement has been reached rent ‘European patent’,
affordable for small, financially call it a ‘system’, leads to seven on the translation requirements which is in effect a
constrained entities like high-tech failings, described in Box 1 on the that would apply with the EU patent that must be
managed and enforced
start-ups. The European Patent next page. As a consequence of patent. Language remains a major in each country target-
Office (EPO), which carries out these failings, the European patent stumbling block. ed for protection.
prior-art searches and tests for system is effectively a tax on 4. Evidence for higher
quality in Europe comes
inventiveness before granting so- innovation, and prevents the On the question of the potential from a lower grant rate,
called ‘European’ patents, per- emergence of an integrated mar- establishment of a centralised a lower workload per
forms well on most quality indica- ket for inventions and technolo- patent-litigation system, EU mem- examiner and other
structural factors as
tors, especially when compared to gies at the very outset of the ber states have so far been unable detailed in van
its US counterpart4. innovation process. This flawed to agree on where and how a Pottelsberghe (2009).
EUROPE SHOULD STOP TAXING INNOVATION

04 BOX 1:
THE SEVEN DEADLY SINS OF EUROPE’S FRAGMENTED PATENT SYSTEM (van Pottelsberghe, 2009)
bruegelpolicybrief

• Affordability: A European patent that is maintained for ten years in just six countries is four times more
expensive than in the US, Japan and many other advanced economies. If all EU countries are targeted for
protection, costs are around 20 times higher than in the US.
• Low quality: most NPOs continue to grant national patents independently of the EPO, meaning that appli-
cants have a choice of routes for protection. This has resulted in heterogeneous quality standards.
• Complexity: enforcing and monitoring patents in many countries is cumbersome, especially for academic
spin-offs and high-tech start-ups.
• Uncertainty: patents of inventions with high market value are frequently subject to litigation. Within
Europe, this can lead to parallel litigations in several countries, often with divergent outcomes (ie one
country upholds a patent, a second country invalidates the very same patent).
• Lack of coherence: First, it is simple to operate ‘parallel imports’. Since patents are rarely protected in all
EU countries, it is possible to put imitation products onto the European market by first entering through a
state in which the competing patented product is not protected and then distributing the imitation prod-
ucts across Europe. Second, there are ‘time paradoxes’, whereby patent infringement damages may be
awarded by a national court for a patent that is later declared invalid by the EPO.
• No coordination at EU level: there is very little if any EU-level coordination of patent policies and other
directly related policies, including science and technology, competition, research and entrepreneurship.
• Weakness in global negotiations: the European patent system does not so far have one single representa-
tive in international negotiations. Rather, national patent offices have signed unilateral agreements that
on past evidence have influenced EPO behaviour (see, for instance, the signatory members of the Patent
Prosecution Highways, or PPHs)5.

European court would be set up, Table 1: Net financial flows resulting from a shift from the current
essentially arguing that national system to an EU patent, by sector (€m)
legal systems differ significantly.
Business Attorneys &
EPO NPOs Lawyers
sector translators
...and an additional cause of
blockage? Designation fees EPO -25 +40 -15
Validation fees NPOs -10 +10
There are two additional explana- Translation costs -20 +129 -129
tions for political inertia: financial Filing patent translation +60 -60
flows and loss of control. The cre- Taking over representation +46 -46
ation of the EU patent would have
significant consequences for sev- Intermediary cost for
+20 -20
maintenance
eral institutions. For instance, the
renewal fees paid for the mainte- Drop in parallel litigation* +121 -121
nance of European patents and Renewal fees** +88 +88 -176
received by NPOs (€ 654 million in Total +43 +78 +250 -270 -121
5. As explained in van 2008) are split into two parts: half
Source: Danguy and van Pottelsberghe (2009), including data from van Pottelsberghe and Mejer
Pottelsberghe (2009), is retained by the NPOs and half is
PPHs are collaborative (2008). The simulations are performed for 50,000 patents granted by the EPO (representing the
agreements that con- remitted to the EPO. Needless to actual annual average over the past few years), assuming EPO would machine-translate all granted
sist of work-sharing say, this practice generates sub- patents into all EU official languages. * Harhoff (2009) for the lower bound simulation of litigation
practices. without coor- costs; ** Based on renewal fees generated by the EU patent being split equally between the EPO and
dination of quality
stantial revenues for NPOs (€327 the NPOs. The dynamic effect of a more attractive patent system would result in higher maintenance
criteria. million, of which about €100 rates and thus more income from renewal fees for both the EPO and NPOs.
EUROPE SHOULD STOP TAXING INNOVATION

million and €40 million for the


German and UK patent offices,
respectively). Danguy and van
Figure 3: Relative patent costs
(cumulated cost per million capita, €s) 05

bruegelpolicybrief
90 Renewal fees (up to 10th year)
Pottelsberghe (2009) have simu-
80 Translation cost
lated the financial consequences
Procedural cost
of a straight switch of 50,000 70
* EPO-13 (6) stands for a European
patents granted by the EPO under 60
patent validated in 13 (6) countries

the current system to the EU


50
patent. Table 1 outlines the net
financial flows, which include 40

changes to renewal fees, 30


translation costs, intermediation
20
costs and litigation costs.
10

In a nutshell, the EU patent would 0


EPO-13 * EPO-6 * EU patent US Japan S. Korea Brazil China
result in net savings of €250
million for the business sector. But Source: Bruegel based on van Pottelsberghe and Mejer (2008) and Danguy and van Pottelsberghe
contrary to common assumption, (2009). Figures refer to 2008.
both the EPO and NPOs would also 3 STRENGTHS AND WEAKNESSES (EEUPC), with exclusive jurisdic-
benefit, in the former case by €43 OF THE PROPOSED AGREEMENT tion in respect of civil litigation
million, and in the latter by €78 related to upholding and invalidat-
million. On the other hand attor- The December 2009 Competitive- ing EU patents and European
neys and translators would lose ness Council reached ‘conclusions patents. The EEUPC would include
€270 million and the drop in paral- on an enhanced patent system in a Court of First Instance, a Court of
lel-litigation costs would amount Europe’. The main conclusions Appeal and a Registry.
to at least €121 million. In other were that a European patent court
words, nearly €400 million would would be created, that the This deal has two broad conse-
be redirected from patent attor- European Patent Network (the cur- quences: the establishment of a
neys, translators rent arrangements single centralised litigation sys-
and lawyers to ‘The system is com- between the EPO tem covering both EU and
patent offices and and NPOs) should European patents, and a possible
the business sector.
plex, untransparent be strengthened, reduction in the relative cost of the
It is worth noting and unpredictable, and that an EU EU patent (see Figure 3), as the
that all NPOs would and is ultimately a patent should be market would cover 500 million
see a net increase in heavy tax on created. The conclu- inhabitants. Danguy and van
their budget, except sions are promising Pottelsberghe (2009) estimate
for the German innovative firms.’ but also have major that the cost per million capita
patent office, which weaknesses. could eventually drop by about 45
would lose the current benefit of percent, depending on the final fee
its ‘largest-economy’ status for The strengths... schedule and translation
European patenting activity. agreement.
An EU patent is envisaged, but so
Whatever the real reasons for far no agreement has been ...and weaknesses
resistance to change, the fact reached on translation require-
remains that the current system is ments associated with it. The main The wording of the Competitive-
overly complex, untransparent and strength of the deal is the ness Council agreement indicates
unpredictable, and ultimately con- progress made on convergence on a very preliminary and fragile
stitutes a heavy tax on individual some aspects of the centralised- agreement. As well as a high
inventors and young innovative litigation process, called the degree of caution, there are five
companies (Veugelers, 2009). ‘European and EU Patent Court’ main weaknesses of the Council’s
EUROPE SHOULD STOP TAXING INNOVATION

‘conclusions on an enhanced financing, with its own financial Still no provisions for SMEs:
06 patent system in Europe’. revenues consisting of court fees.
This could lead to overly expensive
whereas the US and Japan have
had provisions for SMEs for many
bruegelpolicybrief

No language agreement: a ‘sepa- litigation proceedings. In any case, years (SMEs pay only half the
rate regulation’ on the language the Council’s demand for budget fees), the EPO has no fee schedule
regime still has to be agreed to. neutrality of the EEUPC, though for SMEs. This is also true for the
Knowing that a key dimension of part of an agreed political package future EEUPC, which must be self-
the EU patent is its simplified lan- containing positive elements, is funded and might lead to prohibi-
guage regime, a big step still hardly a sign that European gov- tive litigation costs for SMEs.
remains to be taken. ernments are ready to boost
support for innovation. 4 POLICY RECOMMENDATIONS
Another layer of patents: the
envisaged EU patent would be an Governance failure: this is evi- Even if the recent Council conclu-
additional layer, on top of the cur- denced by a fragile agreement, an sions represent some progress on
rent European and national unsolved language puzzle, the lack the road to an effective and effi-
patents. NPOs will still grant of willingness to create a truly cen- cient European patent system,
patents independently from the tralised patent system (three lay- there are still a series of problems
EPO. Thus applicants can still opt ers are still envisaged), and a that must still be addressed. We
for multiple parallel applications to strong focus on an ‘enhanced part- have picked out four issues which
national offices, some of which nership’ between the EPO and are the keys to success:
may provide an easier route to NPOs (the European Patent
protection than the EPO process, Network). It may be noted that • Language
especially for patents with a low NPOs sit on the administrative • Complexity
inventive step. council of the EPO and also influ- • Affordability
ence negotiations on the EU • Governance
Institutional ‘financial’ sustain- patent given that they participate
ability: The EEUPC has, according in the Council’s preparatory work- Problem 1: language. Language
to the Council deal, to be self- ing groups in this field. has so far been a major obstacle to

Table 2: Filing languages at the EPO, by selected country of residence of applicants, 2009
English German French Unknown Total % English*
Austria 362 1141 0 0 1503 24%
Belgium 1438 36 142 3 1619 89%
Denmark 1445 40 1 0 1486 97%
Finland 1429 11 0 6 1446 99%
France 2712 161 6009 4 8886 31%
Germany 4918 20,129 44 2 25,093 20%
Italy 3693 52 7 88 3840 98%
Luxembourg 196 34 22 1 253 78%
Netherlands 6663 47 5 24 6739 99%
Norway 465 20 6 0 491 95%
Poland 141 16 2 10 169 89%
Portugal 101 2 4 0 107 94%
Spain 1135 51 36 26 1248 93%
Sweden 3089 47 5 5 3146 98%
Switzerland 3464 2017 375 3 5859 59%
United Kingdom 4763 18 21 2 4804 99%
Total 102,843 24,452 6764 242 134,301 77%
Source: EPO; the numbers include Euro-direct applications and PCT-regional phase. * = patents filed in English divided by the total of patents filed in
English, French and German.
EUROPE SHOULD STOP TAXING INNOVATION

the EU patent. Instead of compul- language of communication for European patents (for protection
sory translation into several lan-
guages, patents granted by the
business, scientific and techno-
logical matters.
in selected countries) and EU
patents (for protection in the
07

bruegelpolicybrief
EPO should be ‘English only’. There whole EU). There will thus still be
are several reasons for this: • At the same time, switching to ample scope for individual busi-
English would be a resolute nesses to ‘game’ the system. But
• English is the most frequently European step towards the this arrangement is also a clear
used business language world- improvement of the global message that Europe does not
wide, and this is a factor with patent system. An English give top priority to creating a sin-
patents as much as in other translation of the whole docu- gle, market-spanning patent sys-
fields. Of the patent applica- ment would make the codified tem (as the US and China have).
tions filed at the knowledge accessi- The cost of this approach is ulti-
EPO, 77 percent ‘Agreement should be ble to third parties mately borne by the European
are already in (including Japan, economy as a whole. The solution
reached to end the
English (see Table the US, China and is twofold:
2). Use of English current European India), and thus
thus represents patent directly, or at would improve the • NPOs should stop granting
the choice of the least to phase it out identification of patents, but should still provide
business sector, prior art by non- advice and search services for
after a few years of a
especially tech- European compa- local companies.
n o l o g y - b a s e d dual system.’ nies and patent
start-ups and aca- offices, thereby • Agreement should be reached
demic spin-offs. English is also reinforcing the protection of EU to end the current European
de facto the worldwide scientif- firms abroad. patent directly, or at least to
ic and technical language. phase it out after a few years of
Evidence is provided by the • When it comes to checking if a dual system.
rankings of scientific journals, new technology has already
used to gauge academic scien- been patented, patents in Problem 3: lack of affordability for
tists’ production in most national languages are of little SMEs and especially young inno-
European countries. The majori- use. This is because a technolo- vative companies. The EU patent
ty of ranked journals (more gy-based new venture located, would already be a huge step for-
than 95 percent) are English- for example in Belgium, must in ward for these applicants. Relative
6
language . any case look beyond the infor- costs (per million capita) would
mation available in Dutch and drop substantially (Figure 3). But
• The question for the future is French when conducting a free- more could be done to further off-
not if French or German will dom-to-operate survey (ie test- set these high entry fees:
remain scientific and technical ing if the new venture infringes
languages but if English will be any existing patents). • A 50 percent reduction in entry
challenged by Chinese. The Therefore, requiring translation fees for young innovative com-
Chinese emergence is a matter of patents into national lan- panies (filing fees, search fees,
of fact (Figure 2). According to guages does not serve its stat- examination fees) up to the
Thomson Reuters, the number ed objective of supporting sixth year (the average dura-
of scientific articles published innovation. tion of the examination period).
by authors based in China have 6. See for instance the
quadrupled since 2000, with Problem 2: complexity. The • A pay-back process (of the 50 journals listed in the
CNRS ranking in France,
more than 110,000 articles in agreement on an ‘enhancement’ of percent reduction) could be or in the German
2008 alone. The EU should the patent system involves adding scheduled for companies that Academic Association
secure its long-term access to an additional layer to it. The pro- keep their patents enforced for for Business Research
(Verband der
scientific knowledge by ensur- posed system would be composed more than six years. Hochschullehrer für
ing English remains the main of nationally granted patents, Betriebswirtschaft).
EUROPE SHOULD STOP TAXING INNOVATION

Problem 4: Governance failure. • Other key stakeholders than example from the directorates-
08 Presently, 27 NPOs with frequent-
ly diverging views control the EU
NPOs should be part of the
administrative council, includ-
general for research, enterprise
or internal market.
bruegelpolicybrief

system. They fear that reform will ing a representative of the busi-
undermine them. Furthermore, the ness sector (large firms and • The board of the EPO should be
EPO is independent from EU insti- small firms), a representative streamlined, with the number of
tutions, meaning little coordina- of consumers’ associations, a representatives of national
tion between it and the European representative of academic patent offices sitting on it being
Commission. Two steps should be institutions, and representa- reduced from 35 currently to 10
taken to bridge these gaps: tives of the EU institutions, for or 15.

REFERENCES:

Barroso, J. M. (2010) ‘Opening remarks of President Barroso at the Press Conference on Europe 2020, 3 March’,
http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/10/60&format=HTML, accessed 27 March
2010

Council of the European Union (2009) ‘Conclusions on an enhanced patent system in Europe’, 2982nd
Competitiveness (Internal Market, Industry and Research) Council Meeting press release, 4 December,
Brussels

Danguy J. and B. van Pottelsberghe de la Potterie (2009) ‘Cost-benefit analysis of the EU patent’, Bruegel
Working Paper 2009/08

Harhoff D. (2009) ‘Economic Cost-Benefit Analysis of a Unified and Integrated European Patent Litigation
System’, Final Report, Tender No MARKT/2008/06/D

van Pottelsberghe B. (2008) ‘Europe’s R&D: missing the wrong target?’, Bruegel Policy Brief 2008/3

van Pottelsberghe B. (2009) Lost property: the European patent system and why it doesn’t work, Bruegel
Blueprint, Brussels

van Pottelsberghe de la Potterie B. and D. François (2009) ‘The cost factor in patent systems’, Journal of
Industry, Competition and Trade 9(4), 329-355

van Pottelsberghe de la Potterie B. and M. Mejer (2010) ‘The London Agreement and the cost of patenting in
Europe’, The European Journal of Law and Economics 29(2), 211-237

Veugelers R. (2009) ‘A lifeline for Europe‘s young radical innovators’, Bruegel Policy Brief 2009/01

© Bruegel 2010. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted in
the original language without explicit permission provided that the source is acknowledged. The Bruegel
Policy Brief Series is published under the editorial responsibility of Jean Pisani-Ferry, Director. Opinions
expressed in this publication are those of the author(s) alone.
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