Collins | Payment Liability — Time For A Hybrid Solution?

Who is responsible when an advertising agency fails to pay the media provider? What happens when a publisher has been paid for advertising and the supply side platform that subsequently sold the inventory is not paid by its client? Now may be the time for both media providers and advertising agencies to set aside their differences to adopt a middle ground that benefits all concerned.

At issue are competing liability positions. In return for a promise of a payment later, media companies apply their limited resource to communicate a message on behalf of an advertiser. The media company cannot repossess that resource — their audiences’ attention — if the advertiser or someone else in the supply chain fails to pay them.

Advertising Liability Background

A 2018 opinion piece by Marsha Appel of the 4As (American Association of Advertising Agencies), posits that it was the unexpected 1972 bankruptcy of Lennen & Newell, then the country’s 13th largest advertising agency, that set the forces in motion to destroy agencies’ sole liability position. The industry had held this liability position nearly a century. Agencies, particularly agencies that belonged to the 4As, told media companies that they alone were responsible for paying for media advertising schedules that they placed.

There had already been some cracks in the policy’s foundation. When television groups started facing exposure in the multimillions of dollars, they understandably wanted some assurances that they would be paid. Major networks stipulated that they had the right to go after the advertiser if the agency failed to pay. Agencies insisted on sole liability. Despite competing language in contracts and insertion agreements, business was conducted on a handshake.

Thus, CBS did not have a signed agreement with Lennen & Newell when they sued agency client Stokely-Van Camp for $428,000 in unpaid advertising time. The lawsuit took the better part of the 1970s. Ultimately, the court ruled against CBS saying that Stokely-Van Camp couldn’t be required to pay twice for the advertising.

Media companies’ demand for joint and several liability — the ability to pursue both agencies and their clients regardless of whether the agency had been paid — and the 4As’ insistence on sole liability continued into 1990. Then, in 1991, the group released a position paper endorsing sequential liability. Simply put, an agency was only responsible for paying a media provider after it had been paid by its client.

Current Situation

Earlier this year, Digiday reported that sequential liability terms are being used by some supply side platforms to claw back payments from publishers. Author Tim Peterson said: “Today within the programmatic advertising context, sequential liability has been interpreted to extend from an advertiser to the advertising agency as well as to the demand-side platform provider along with the supply-side platform provider and the publisher. Thus, such clauses can effectively leave a publisher holding the bag.” He further reported that the contractual clause supporting such “clawbacks” tends to be placed where it is easily overlooked, “in the section of a contract about how payments should be handled when impressions are found to be fraudulent.”

A New Approach

Former MFM Board Member Robin Szabo, president of Szabo Associates, reports that despite the issues, both media providers and advertising agencies are holding firm on their stated liability positions. Media companies expect joint and several liability, while agencies stand behind the 4As’ sequential liability position.

Despite seemingly intractable positions on both sides, Szabo says most media companies are reluctant to go after agencies that been paid by advertisers. Nor will they go after advertisers that have paid agencies when those agencies fail to pay the media providers. It is, he says, the “absence of industry custom and practice” regarding payment liability that continues to plague the industry.

As long as advertisers and agencies remain “solvent,” Szabo believes that sequential liability is a fair and workable policy. However, when one of the parties — advertiser or agency — fail to pay, media companies are left to decide whether or not to pursue all the involved parties in order to get paid.

In a column for MFM’s member magazine, The Financial Manager, Szabo suggests that now is the time to consider a new approach. He describes this as “a hybrid of both approaches that embrace the concept of sequential liability but retains the joint-and-several clause as the fallback if the situation goes awry.” There are, he says, some essential elements to consider.

Cooperation

The “major pitfall of sequential liability” is that advertisers and media are not engaged with each other in the media-buying process. The first step in the cooperative process Szabo says is for the advertiser, the agency and the media company to ensure that everyone knows what’s going on.

Advertisers, he says, should understand that it is in their best interest for media providers to know their agreements with agencies. That way, they reduce the risk of being pursued by media companies for payments when their agency fails to make them. This will also ensure that media provider will know where to direct collections efforts.

Szabo suggests that advertisers require “written verification” that their agency has paid for media contracted on their behalf. At the same time, agencies that share information about themselves and their advertisers with media companies are then able to work together as allies when advertisers fail to pay.

Disclosure

Because the agency owns the contract with the advertiser, they should be the primary source of information on their client and be willing to provide details to the media company. Szabo says that can include payment terms, the agency’s internal collections efforts, and how they are working with advertisers with potential credit issues. This, along with sharing information on payment delinquencies should they arise, allows the media company to establish their internal expectations for “payment receipt.”

Dispute Resolution

An agreed-upon policy for resolving liability disputes is key to the hybrid approach says Szabo. He poses several questions here. “If the agency refuses to pay, will media inform the agency that they intend to notify the advertiser of the nonpayment? If the agency claims it has not been paid by the advertiser, will media contact the advertiser to investigate the problem? And if so, when will they do it?”

It’s clear, according to Szabo, that the existing impasse, the situation in which agencies insist on sequential liability positions is “costly” for all parties. It results in revenues being delayed or lost because of liability disputes. The problem will only be solved when all industry players can “act together as partners in a transparent manner.”

A digital copy of the May/June 2020 issue of TFM, which includes Szabo’s column, “Calling a Truce,” is available on the MFM website.

More Credit And Collections Topics

Credit and collection topics are among those being covered during MFM’s virtual Media Finance Focus conference, which continues through Aug. 27. Upcoming panels include Bankruptcy Update in the Midst of COVID-19 on Tuesday, July 28, at 1 p.m. ET and The Sales/Credit Relationship at 1 p.m. on Thursday, Aug. 27. Information about registering for these and other sessions is available on our conference website here.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at [email protected] and via the association’s LinkedIn, Facebook, Instagram and Twitter accounts.