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Sample Points And Authorities In Opposition To TRO To Enforce Covenant Not To Compete

Posted by: on Thu, Dec 13, 2012

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Before analyzing the enforceability of the subject non-compete clause in the Agreement, it should be noted that Plaintiffs are not even proper parties in interest to bring the present action. NRCP Rule 17(a) states that every action shall be prosecuted only by the real party in interest. This important principle of law was recognized in Nevada as early as 1890, where in the case of Gruber v. Baker, 20 Nev. 453, 23 P. 858 (1890), the Court held that when ownership of an entity passes to another, without reservation or conditions, the new owner becomes the real party in interest and an action must be brought in this new owner’s name. See, also the recent case of Easton Bus. Opportunities, Inc., v. Town Exec. Suites, 230 P.3d 827 (2010). In this case, Plaintiffs in the Application, especially in the affidavits attached thereto and the Exhibits attached, unequivocally admit that W Corporation purchased S from the Plaintiff, J.R. Crane, and its other principals in August, 2012. To the extent then that the non-compete clause in the Agreement is in fact enforceable, only W Corporation would have the right to take legal action for its enforcement. Plaintiffs are simply a franchisee of W Corporation. They are not real parties in interest having a right to enforce the subject non-compete clause signed by L with S.

Therefore, pursuant to NRCP Rule 17(a), Plaintiffs’ action against L should be dismissed, the Temporary Restraining Order which was granted should be expunged and dissolved, and L should receive the $500 bond monies posted as partial reimbursement for the damages and expenses he has incurred herein. However, even if it was determined that Plaintiffs were a proper party in interest, as hereinafter demonstrated, the subject non-compete clause is no longer enforceable against L.

A. Does Nevada enforce non-compete clauses?

In Hanson v. Edwards, 426 P.2d 792 (1967), Nevada’s Supreme Court held that an agreement on the part of an employee (a podiatrist) not to compete with his former employer after termination of the employment (within 100 miles of Reno) is in restraint of trade, and “will not be enforced in accordance with its terms unless the same are reasonable.” There was no time limit in the covenant. The test laid down by the Court in this case is whether the restrictions imposed upon the employee are:

“any greater restraint than is reasonably necessary to protect the business and goodwill of the employer. A restraint of trade is unreasonable, in the absence of statutory authorization or dominant social or economic justification, if it is greater than is required for the protection of the person for whose benefit the restraint is imposed or imposes undue hardship upon the person restricted.” Id.

The Court noted that the two critical issues are time and territory (geography). In other words, the length “of time which the restraint is to last and the territory that is included are important factors to be considered in determining the reasonableness of the agreement..” Id. The Court applied the reasonableness standard to geographical reach, duration and scope. The Court allowed the restrictive covenant for one year (the time limit was supplied by the Court since the clause was silent on time), but only within the city limits of Reno.

B. Guidelines for Territory Restrictions

The Nevada Supreme Court in Camco Inc. v. Baker, 936 P.2d 829 (Nev. 1997), again addressed the enforceability of a non-compete clause contained in an employment agreement. While recognizing the validity of reasonable non-compete clauses, the Court noted that post-employment anti-competitive covenants are carefully scrutinized by the courts with much greater care than those contained in a sale of a business contract, and that clauses with overly broad territorial restrictions were not proper. The Court then struck down and modified the clause in that case.

In the present case, Plaintiffs now seek to have L prevented from making sales anywhere or engage in “any business which is competitive with the S.” The S business and products were taken over by W Corporation, which markets a far greater assortment of products than S ever marketed. However, even if S itself was still a functioning business, prior to W Corporation’s purchase of the business, S had marketed to well-known major companies throughout the United States and Canada. L submits that any attempt to restrict him from competing in this broad of a market after termination of his employment would be unreasonable. It would not only be unnecessary to protect the interests of his former employer, but it would also unreasonably hinder him from making a living in the only occupation he has known or is qualified for at this late period in his life

Other decisions throughout the United States have also held that the failure of a covenant to contain any geographical restrictions can render the covenant overly broad and therefore be unenforceable. Thus, even judging the enforceability of the non-compete clause in the Agreement solely with respect to the area of its coverage (and without considering the breaches of the Agreement and the fact Plaintiffs are not proper parties to even try to enforce the Agreement), the non-compete clause is clearly over-broad and unreasonable.

C. Guidelines for Time Restrictions in Nevada

In Jones v. Deeder, 913 P.2d 1272 (1996), the Supreme Court of Nevada reviewed a restrictive covenant prohibiting a former employee from competing with his former employer within a 100 mile radius for five (5) years. The court concluded that the five-year restriction was unreasonable because it placed too great a hardship on the employee and was not reasonably necessary to protect the former employer’s interests. The Nevada Supreme Court has found the following time limitations to be reasonable:

(1) A two year restriction against an orthopedic surgeon from practicing medicine within a five-mile radius by the former employer medical client. Ellis v. McDaniel, 596 P.2d 222 (Nev. 1979).

(2) A restriction against a podiatrist from practicing in one particular city. There was no time limit in the agreement so the Court supplied a one-year limit. This type of procedure, where the court amends or supplies its own reasonable restrictions, is sometimes called a blue pencil or blue-line rule. This allows the court to modify non-compete clauses in certain situations. See, Hansen v. Edwards, 426 P.2d 792 (Nev. 1967).

In the present case, the non-compete clause in the Agreement between L and S provides no territorial limits, making it patently over-broad and unenforceable. The time limit imposed is for one year beyond the termination of the “Contract Period”. (See, Section 1.01 of the Agreement, defining “Contract Period”.) Plaintiffs seek to have the “Contract Period” extended from November, 2012, the original contemplated termination date, to November 1, 2015, one year after the end of the extension period. This would result in a non-compete period being imposed upon L of over three years following his wrongful termination in August, 2012, by S and its principals. Clearly, it would not be fair or proper to impose such a non-compete restriction upon an employee or representative of the employer, where the employee in good faith agrees with the employer to extend their “Contract Period” and then shortly thereafter the employee is fired without cause. Since, S and its principals breached the Agreement after the extension was signed in November, 2011, by firing L without “cause” (and even disregarding the consequences of their breaches as to the enforceability of the Agreement itself), the Court should now determine that the time period for enforceability has expired. The extension period of the Agreement which was wrongfully terminated by S and its principals, in all fairness and justice, should not be the measuring stick for the non-compete time period, assuming it was otherwise enforceable. Rather, at a bare minimum it should be recognized that ( and with not even considering the other defaults and breaches) the non-compete clause expired on November 1, 2012, one year after the original termination date under the Agreement.

D. Is the non-compete agreement assignable when the employer’s business is sold?

In 2004, the Nevada Supreme Court in Traffic Control v. United Rentals, 87 P.3d 1054 (Nev. 2004), held that in the absence of a separate agreement, negotiated at arm’s length and supported by separate consideration, which explicitly permits assignments of the non-compete agreement to the new business purchaser, an employee’s noncompetition clause is not assignable (absent the employee’s express consent) when a successor corporation acquires the assets and business of the employer entity. In this decision, the Court repeatedly explained that even if the agreement containing the non-competition clause also contains an assignability clause, such a covenant must still be “supported by separate consideration from that given in exchange for the covenant itself.” The Court explained further that “this places the burden on the employer to seek assignability and adequately compensate the party with the lesser bargaining power for the possibility that a stranger to the covenant may ultimately assume the right to its enforcement.” Otherwise it would be unfair for an employee to suddenly be thrust into the position of working for a much larger company or business entity. The Court concluded that: “Covenants not to compete are personal in nature and therefore are not assignable absent the employee’s express consent. Further, an employer must obtain such consent through arms-length negotiation with the employee, supported by valuable consideration beyond that necessary to support the underlying covenant.” Id at 1060. In other words, the employee must be separately compensated and agree to the assignment with separate consideration other than that which was utilized for the covenant itself, such as continued employment.

In the present case, it appears that W Corporation was aware of this 2004 law in Nevada and consequently asked the S principals to approach L in August, 2012, to sign its agreement. As noted above, the S principals did approach L and specifically requested that he sign new covenants and new employment agreements containing new noncompete clauses, in light of the pending sale to W. When he refused, he was promptly fired. L was never paid any consideration in the purchase by W Corporation of S to allow a continuation of his non-compete restrictions under the Agreement. As a matter of law, the covenant not to compete in the Agreement, and now as sought to be enforced by Plaintiffs, is no longer valid since it was not supported by separate valuable consideration in the transfer of the S business to W. In fact, W knew in purchasing the business that L had refused to sign its more extensive and onerous non-compete clauses.

Other courts agree with the requirement for separate consideration to support non-compete clauses, separate and in addition to the consideration that arises from the continued at-will employment. In a recent case, Preston, 2012 WL 66 (May 2012), the Wyoming Supreme Court earlier this year explained that the reason for this requirement is that covenants not-to-compete are closely scrutinized by courts to ensure that there is a proper balance between the competing interests of the employer and the employee. The court observed that the requirement that a covenant not-to-compete must be supported by reasonable consideration separate from continued at-will employment was based, in part, on the sanctity of the right to earn a living. Because restraints on trade that attend non-competition agreements limit an employee’s ability to earn a living, additional consideration is required.

Applying these guiding principles to the present case, the facts establish that L has been working continuously in the same line of business selling similar products since 1978. His affidavit indicates that with only a high school education, this is the only job he knows how to perform and it would be reasonably impossible for him to make a living in today’s economy without being able to sell these types of products. He would collapse financially, and he could lose everything.

Because S did not live up to the terms and conditions of his employment contract, and he was fired without cause, he had no choice but to depart and seek out an attorney willing to file breach of contract claims against his prior employer, which the undersigned counsel were in the process of doing prior to the filing of Plaintiff’s Complaint in these proceedings. L’s wife works with him performing the administrative responsibilities associated with his sales efforts. His wife also has only a high school education. Both are in their mid-50’s. It would be extremely difficult to learn a new trade or to obtain further education at this late age. Further, it should be noted that the customers he has been selling to have been with him for many years, indeed, years before S was even in business. His customers are located all over the United States and Canada and to restrict his ability to sell to them would preclude him from making a reasonable living and survive financially. .

E. S and its principals were in breach of their contracts with L.

The law is clear that when the employer is in breach of its employment agreement with an employee, it cannot thereafter enforce a noncompetition agreement. Accordingly, the court in Parr v. Alderwoods Group, Inc., 604 S.E.2d 431, 268 Va. 461 (2004), held: “We will affirm the trial court’s judgment holding the noncompetition provision of the Management Agreement was unenforceable because Alderwoods breached the Asset Purchase Agreement when it defaulted its payment obligations under that Agreement.“

Likewise, a recent case from Massachusetts earlier this year held that a company may not enforce a noncompete/non-solicitation agreement against a former employee when the former employer had materially breached the agreement by changing the terms of his employment. Specifically, the employer changed the employee’s job responsibilities and title, and cut his annual salary by $40,000. This is a reminder to employers that they can sacrifice the enforceability of a noncompete clause by materially changing the terms of an employment agreement. See, Protoge Software v. Colameta, (Sup. Ct. Middlesex, July 16, 2012) (Kirpalani, J.).

S and its principals clearly attempted in the sale of S to W Corporation to increase the constraints, duties and limit the rights of L regarding non-competition. The Plaintiffs’ efforts in this case to seek the equitable remedy of a restraining order against L, would go against the legal principle that “one seeking equity may not do so with unclean hands.” The unclean hands doctrine generally bars a party from equitable relief “because of that parties own inequitable conduct.” See, Las Vegas Fetish & Fantasy Halloween Ball, Inc. v. Ahern Rentals, Inc., (124 Nev. 272, 182 P3rd 764 (2008). The Court in this case then discussed a Washington Supreme Court decision recognizing that the unclean hands doctrine precludes a party from obtaining an equitable remedy when that party’s connection with the subject matter or transaction or litigation has been “unconscientious, unjust or marked by the want of good faith.” Quoting from Income Investors v. Shelton, 3 Wash.2nd 599, 101 P.2d. 973-974 (1940). See also, Gravelle v. Burchette, 73 Nev. 333, 341, 319 P.2d. 140, 141 (1957) wherein the Nevada Supreme Court noted that the unclean hands doctrine applies where the misconduct at issue “is connected with the matter in litigation so that it has in some manner affected the equitable relations subsisting between the parties and arising out of the transaction.”

The Nevada Supreme Court in Number One Rent-a -Car v. Ramada Inns Inc., 94 Nev. 779, 587 P.2d. 1329 (1978), noted that a temporary restraining order is an equitable remedy. In this case the District Court judge granted a motion to dissolve a temporary restraining order. The Court explained that a preliminary injunction to preserve the status quo was normally available upon a showing that the party seeking it enjoys a reasonable probability of success on the merits and that the defendant’s conduct, if allowed to continue, would result in irreparable harm for which compensatory damages are an inadequate remedy. The court then upheld the lower court’s dissolution of the temporary restraining order since the rental car agency had “not alleged that it has performed all of the terms, covenant and conditions of the agreement on its part. Thus, it had not shown that it had acted without unclean hands and that it was reasonably likely to success on the merits.” Id. at 781. Likewise in the instant case, L has outlined a series of egregious, unconscionable, and unjust actions that show the Plaintiffs’ and S’s complete lack of good faith. Consequently, the Plaintiffs may not obtain the equitable remedy of the temporary restraining order or preliminary injunction since they do not come to the court with clean hands in seeking equitable relief. Plaintiffs, on these grounds alone, are simply not eligible to seek injunctive relief. There is no question in this case that the breaches, unjust actions and lack of good faith and fair dealing on the party of S and Plaintiffs, all relate to the same employment agreement which contains the purported now enforceable non-competition provision.

F. Plaintiffs do not meet the criteria for being awarded injunctive relief as they cannot show a likelihood of success on the merits.

In order to be awarded continuing preliminary injunctive relief herein, the Plaintiffs must show “a likelihood of success on the merits and a reasonable probability that the non-moving party’s conduct, if allowed to continue, will cause irreparable harm for which compensatory damage is an inadequate remedy. Pickett v. Comanche Construction, Inc., 108 Nev. 422, 426, 836 P.2d 42, 44 (1992).” Dangberg Holdings Nevada, LLC, v. Douglas County, 115 Nev. 129, 141, 978 P.2d 311, 318 (1999) [emphasis added].

In order to demonstrate a likelihood of prevailing successfully on the merits of this action, Plaintiffs will, therefore, have the burden of demonstrating that the subject non-compete clause in the Agreement is in fact enforceable, that there was separate consideration paid to L for the covenant, that they are proper parties in interest to seek enforcement of the non-compete clause, and that there was not a breach of the terms of the Agreement and other contracts S had with L. Fur the law is clear that a party may not come into court and demand an equitable injunction with unclean hands..

Where Plaintiffs’ entire case is based on a faulty misreading of the subject Agreement, an omission of the facts relating to the parties’ relationship, related agreements and breaches thereof, there is no valid basis to enforce the non-compete clause against L. Plaintiffs cannot demonstrate the likelihood of success on the merits for purposes of obtaining injunctive relief. It is the Plaintiffs as former principals of S who breached the Agreement. It is the Plaintiffs, as principals of S, who gave L blanket permission to sell the S products sold to him by S to whomever they pleased, and then attempted to renege on this contract once L would not sign the onerous agreement with W. It is the Plaintiffs and S and their principals who were stealing commissions from L. It is the Plaintiffs who fired L for refusing to sign W’s new agreement. For each of these reasons, showing the unlikelihood of Plaintiffs succeeding with their claims in this case, the Temporary Restraining Order cannot be extended and should be dissolved immediately.

G. Plaintiffs do not meet the criteria for being awarded injunctive relief as they cannot show any irreparable harm and they are not seeking to preserve the status quo, but to alter the status quo, herein.

As stated above, in order to be awarded continuing preliminary injunctive relief herein, the Plaintiff must show “a likelihood of success on the merits and a reasonable probability that the non-moving party’s conduct, if allowed to continue, will cause irreparable harm for which compensatory damage is an inadequate remedy. Pickett v. Comanche Construction, Inc., 108 Nev. 422, 426, 836 P.2d 42, 44 (1992).” Dangberg Holdings Nevada, LLC, v. Douglas County, 115 Nev. 129, 141, 978 P.2d 311, 318 (1999) [emphasis added].

In addition to being unable to demonstrate a likelihood of success on the merits, Plaintiffs cannot show that any conduct of L will cause irreparable harm for which compensatory damages will be inadequate. 90% of the S product sold to L has already been sold. The value of the remaining 10% of product is insignificant and its final sale by L to his customers would not cause Plaintiff’s any “irreparable harm”. Further, L obviously has no reason or need to further represent himself to any customers as an employee, agent, or operative of S. In fact S is no longer in business. W Corporation now owns the business and distributes the product formerly distributed by S. Plaintiffs’ ability as a franchisee of W to sell the S product is controlled by W Corporation. They would not be impacted in exercising their franchise rights to sell the S product by L’s continuing sale of aerosol and cleaning products unless W Corporation granted L a franchise or other right to again start selling the S product. L, as noted in his affidavit attached hereto, is careful to explain to customers, old and new, that he is no longer associated with S.

H. Plaintiffs cannot validly assert under the theory of confidential information or trade secrets that L is restricted from contacting customers he dealt with while under contract with S, because the Agreement was breached by S and its principals, and its non-compete clause is therefore unenforceable. Further, and, because the identity of these customers was established primarily before L even contracted with S, and they are well-known businesses to the average person throughout this country and Canada, L is not relying upon any confidential lists of customers but simply relying upon his own memory and awareness of potential customers to solicit in making his sales.

The Restatement of the Law, Second, Agency, at §396, provides in pertinent part with respect to a person soliciting customers of his former employer that:

Unless otherwise agreed, after the termination of the agency, the agent:

(a) has no duty not to compete with the principal;

(b) has a duty to the principal not to use or to disclose to third persons, on his own account or on account of others, in competition with the principal or to his injury, trade secrets, written lists of names, or other similar confidential matters given to him only for the principal’s use or acquired by the agent in violation of duty. The agent is entitled to use general information concerning the method of business of the principal and the names of the customers retained in his memory, if not acquired in violation of his duty as agent; [Emphasis added].

Thus, in the present case, while it might be improper (assuming the Agreement was still valid after the defaults of S and its principals) for L to use any trade secrets or confidential written information he acquired while working for S to compete against S (or now W Corporation as the assignee and successor of S), there is nothing confidential about the general information which L knows and which is retained in his memory regarding the identity of customers he may solicit in competition with Plaintiffs in their sale of the S product. This is especially true where most of this customer information was not acquired during his employment with S in the first instance, in any event.

The comment to Clause (b) of the above-cited Restatement section further explains as follows:

“[D]uring his agency, an agent frequently acquires information concerning the methods of his employer in doing business and becomes acquainted with his employer’s customers and their desires. Information of this sort is barred from use in competition with his employer only to the extent that, considering all the circumstances, it would be unfair to his former employer for the agent to use it. In determining this, the desirability of permitting employees to be free to terminate the relation and the fact that often their chief assets after such termination consist of the special skill and knowledge acquired during the relation are factors to be considered. Thus, although an agent cannot properly subsequently use copies of written memoranda concerning customers, which were entrusted to him or made by him for use in the principal’s business, or processes which the employer has kept secret from other manufacturers, he is normally privileged to use, in competition with the principal, the names of customers retained in his memory as the result of his work for the principal and also methods of doing business and processes which are but skillful variations of general processes known to the particular trade.” [Emphasis added].

In Insure New Mexico, LLC v. McGonigle, 995 P.2d 1053, 1059 (N.M. Ct. App. 2000), the court in ruling that a confidentiality provision in an employment contract did not prevent a former employee from competing for the former employer’s customers as their identity was not a secret or confidential, since “anyone could easily identify potential customers in the . . . area.” Similarly, in Catalogue Service of Westchester, Inc. v. Henry, 484 N.Y.S.2d 615, 616-17 (N.Y. Ct. App. 1985), the court noted that:

“It is basic law that absent a covenant not to compete (and none was contained in the employment agreement), an employee is free to compete with his or her former employer unless trade secrets are involved or fraudulent methods employed, and’ that remembered information as to specific needs and business habits of particular customers is not confidential.’ [Citations omitted]. . . . Nor will trade secret protection attach to customer lists where such customers are readily ascertainable from sources outside the former employer’s business. Id. (Emphasis added).

See also, McKesson Medical-Surgical, Inc. v. Micro Bio-Medics, Inc., 266 F. Supp.2d 590, 596 (E.D. Mich. 2003), where the court held: “In this Court’s opinion, customer lists developed by the employee are not protectable ‘trade secrets.’ To the extent that the list of customers accumulated by the employee includes ‘needs of customers’ as learned by employee during the course of his employment, such information is not protectable as a ‘trade secret.’ . . . To hold otherwise, would subject every former employee who elects to call on customers he previously called upon with the former employer to a lawsuit [and] would essentially interpret the MUTSA [Michigan Uniform Trade Secrets Act] to be a blanket, statutorily created non-compete agreement between sales people and their former employers. . . .”..

Similarly, in the present case, since the noncompete clause cannot be enforced, L is free to sell to easy to find stores and customers and those known in his memory. Here, L, even without relying upon his memory, could easily obtain the names and addresses of the construction stores and customers he solicits in his business from phone books and internet searches. As such Plaintiffs cannot validly assert that even with the striking of the non-compete clause in the Agreement (for the reasons mentioned above), L should restrained from soliciting customers he solicited while working for S.

III. CONCLUSION

L is not subject to any noncompete agreement with the Plaintiffs. The Agreement relied upon by the Plaintiffs was between L and S. The S business and assets were sold by S and its principals to W Corporation which now distributes the S products. Plaintiffs are a franchisee of W, not an assignee or successor of S. They cannot therefore be third-party beneficiaries of any Agreement between S and L. They are not proper parties in interest with respect to any non-compete clause found in the Agreement and thus are not entitled to try to enforce the clause pursuant to NRCP Rule 17(a), which requires that all actions can only be pursued by the real party in interest.

Even if Plaintiff’s could qualify as third-party beneficiaries of the non-compete clause in the Agreement, the clause itself is overly broad as to territory and as to its time limit, and is therefore unenforceable. Or, if it ever was enforceable, the restrictions thereunder expired on November 1, 2012, pursuant to the Agreement. Plaintiffs should not be allowed to assert the extension of the restrictive period beyond that date due to the extension of the Agreement signed in November, 2011, because shortly after the extension was signed, L was wrongfully fired by S and its principals without cause. In addition, L has learned that S, both before the signing of the extension, and thereafter, breached the Agreement in many ways as more fully explained above. It would be treacherous and unconscionable for an employer to extend an employee’s non-compete clause, which terminated one year after the contract terminated, by an extension of three years to the contract, and then shortly thereafter fire the employee without cause and assert that the non-compete period had been extended for another three years. The defaults and breaches of the Agreement committed by S and its principals, both before and after the extension alone render the Agreement and its non-compete provisions unenforceable.

Lastly, it is incomprehensible that Plaintiffs would accuse L of violating a non-compete agreement with S, when S had in fact specifically sold product to L for resale, and agreed with him in a written memorandum that he had S’s permission to sell the product to anyone he pleased. Plaintiffs cannot come to the Court and request an equitable remedy such as a Temporary Restraining Order or Preliminary Injunction with such stained dirty hands. There is, accordingly, no reasonable or just basis upon which the Plaintiffs can restrain L from engaging in the only business he has known and for which he is qualified, and depriving him of his livelihood. Plaintiffs as a franchisee of W Corporation now have the right to sell S products distributed by W in the Las Vegas, Nevada area. After L sells the remaining S products he purchased from S, before it was sold to W (for resale to anyone he pleases), he will not be further selling S products in competition with Plaintiffs, unless he negotiated the right to a competing franchise with W Corporation. While L will undoubtedly be soliciting customers that Plaintiffs may want to solicit to purchase aerosol and cleaning products of other manufacturers, the customers he solicits, for the most part, are those he has known for years, long before becoming associated with S. Further, the customers he solicits are well-known businesses easily located and identified by simply searching the yellow pages or standard advertising literature available to everyone. He is not using information he obtained in any unique or confidential manner as a result of his relationship with S.

For all of these reasons,, the Application should be denied, the previously issued Temporary Restraining Order should be expunged and dissolved, and the bond posted in conjunction therewith should be released to L to help compensate him for his costs, attorneys’ fees, and other losses suffered while subject to the Temporary Restraining Order.

DATED this _____ day of November, 2012.

ALBRIGHT, STODDARD, WARNICK & ALBRIGHT

By___________________________________

G. MARK ALBRIGHT, ESQ.

Nevada Bar No. 001394

WHITNEY B. WARNICK, ESQ.

Nevada Bar No. 001573

801 South Rancho Drive, Suite D-4

Las Vegas, Nevada, 89106

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