June 9, 2016
The cat is out of the bag. The Association of National Advertisers report about non-disclosed agency practices released this week found that non-transparent business practices were “pervasive” in the U.S.
In the lead-up to the report, there was dark talk of “jail.” But while it caused a stir and will undoubtedly lead to hard questions put to agencies, legal experts say it is unlikely to have any significant legal ramifications, especially since the ANA chose not to name names of those walking on the shady side of the street.
“As of now, there are absolutely no legal repercussions at all because no one is named,” said David O. Klein, managing partner at marketing law firm Klein Moynihan Turco. “But if names do come down the pike at a later juncture, then it would be a different scenario.”
ANA chief Bob Liodice said that the goal of the study was not to expose criminal activity and that any legal considerations or potential ramifications were well beyond its scope. “The ANA is not providing any legal counsel,” he said. “Since legal is beyond the scope of our study, every ANA member will make their own decisions as to whether there are any legal implications.”
The report itself notably steered clear of the words “fraud” or “illegal,” and did not specifically identify agencies or individuals responsible — although it did provide anecdotes of potentially dubious activities. According to the report, findings revealed “potentially problematic agency conduct concealed by principal transactions” wherein one party “purchases media on its own behalf and later resells it to a client after a markup.”
Media rebates are a condemned but common practice abroad, including in several European countries and in South America. In the U.S., agencies are supposed to disclose any such incentives and return them to the advertiser, unless otherwise previously agreed in the contract. But it doesn’t always work that way. The report found that some contracts allow for agencies to engage in non-transparent business practices.
The report cites a former executive from an agency within a holding company, who described how his agency adopted a “defensive retreat” approach to transparency-related language within client master service agreements.
“It became a game of words in how you described things,” he said. If the client insisted on some transparency, the agency wrote language that limited how much information it had to divulge, even in the event of an audit. “The agency’s default position,” he said, “was to avoid including any transparency clauses at all.”
It all boils down to what the report calls a “fundamental disconnect in the advertising industry regarding the basic nature of the advertiser-agency relationship.” That disconnect, said Brian Wieser, senior analyst at Pivotal Research, is that agencies believe their job is to act within the contract but marketers believe agencies should be acting in the client’s best interest. Sometimes, those two things are at odds.
The way for advertisers to protect their interests, experts say, is to pay more attention to their contracts and push for audit rights. So far, advertisers have either been granted limited audit rights or are simply not aware of the auditing rights they do have, said Manuel Reyes, CEO of media consulting and auditing firm Cortex Media.
Marketers, therefore, might renegotiate contracts and hire auditing firms to assess whether their agencies are providing them value for their money. There’s a chance that some brands might even decide to sue their agencies if they find evidence of mismanagement of funds, fraud or a breach of contract through their auditing exercises. It’s not unprecedented: In 2005, Ogilvy & Mather executives were sent to federal prison for over-billing the White House anti-drug account, and in 2003, former Grey Global Group executive Mitchell Mosallem was sentenced to 70 months in prison on antitrust, fraud and tax charges.
“I’m not suggesting that it would happen, but if it did, my expectation is that it would not rise to a level of criminality and be a civil matter,” said Klein. “It all depends on the private right of action by a marketer if they move in on their audit rights and find evidence they want to move ahead with.”
But even if individual marketers take the report seriously and decide to act upon it, they are not guaranteed transparency, said Thomas Bridge, CEO of media auditing firm Media Management.
“It’s impossible to have 100 percent transparency with outside agencies,” he said.