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The Advertising Agency Contract
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By William M. Weilbacher

THE ADVERTISING AGENCY CONTRACT The relationship with the advertising agency should be formalized in a contract. In the absence of a formal contract, there are bound to be discussions, if not confrontations, about what exactly the advertising agency is supposed to do, how it is to be compensated, and how the relationship may be terminated.

There is substantial evidence that many advertisers, particularly larger advertisers, have a formal contract or memorandum of agreement with their agency. A question on this topic was included in the 1989 Association of National Advertisers' study of agency compensation, and 89 percent of all companies responded that such a formal document existed. When a similar question was asked in 1979, 76 percent of the respondents said such a document existed.

It is always wise to have some sort of formal written contract between advertiser and agency. In addition, experience indicates that at least the broad outlines of this contract should be agreed upon before the formal appointment of an agency is publicly announced. This approach forces both sides to come to grips with important issues quickly, and this, in turn, tends to guarantee reasonable compromises in areas of disputes, as well as moderation on both sides.

Nothing is worse than delaying discussion about a contract and then delegating it to staff attorneys or outside counsel, who have little understanding of either the issues involved, the discussions held, or explicit or implied agreements reached during the actual search pro- cess.

In the case of one packaged goods advertising account, negotiations about contracts were still going on between advertiser and agency two years after the original appointment. At various times the agency had been represented in these discussions by three different senior ac- count managers. The advertiser was represented by two different attorneys, both from the middle ranks of the in-house legal staff. Neither side felt any time pressure to reach agreement, and whenever an irreconcilable issue arose, the talks were halted for some weeks before beginning again. As the negotiations dragged on, the adver- tiser's lawyers demonstrated a total ignorance of the nature of advertiser-agency relations, trade practices in the field, and the nature of the advertising agency business. They were rigid and impla- cable and took virtually every agency proposal as unacceptable, if not totally offensive. Finally, the advertiser decided to terminate the agency's services because it was dissatisfied with its work. Although there was no contract, the negotiating teams were in place, and finally, with a clear-cut mission, they quickly reached a termination agreement that was acceptable to both sides. All of the pointless con- tract negotiations could have been avoided if the advertiser had insisted on a memorandum of agreement covering the major issues of concern before the formal announcement of agency appointment.

The Major Issues Between Advertisers and Agencies...

No two advertiser-agency contracts are the same. There are matters that seem to be important to some advertisers and agencies, but are not to others. This is true, for example, in the case of cooperative advertising. If an advertiser has a cooperative advertising program, both advertiser and agency will want to be sure that the agency's participation in that program, if any, is clearly specified. Both sides also will want to clearly specify questions of agency compensation for its contributions to the cooperative advertising program.

The diversity of issues that can concern advertisers and agencies is clearly demonstrated in a 1963 ANA study. In that study, 109 advertisers submitted agency contracts for analysis. Collectively, these contracts contained 448 different kinds of contract clauses. No one contract con- tained all 448 clauses, of course, and many of the items reflected issues peculiar to a single advertiser or agency. But the diversity of advertiser-agency contract concerns is clearly indicated by the gross number of discrete contract clauses revealed by this study. It is un- likely that the number of topics covered by advertiser-agency contracts has declined since 1963.

Yet there are certain issues that should be covered in all advertiser- agency contracts. These include matters that are either of universal concern or likely to concern most advertisers and agencies, such as the following:

* The brands or products to be handled by the agency.
* The agency's responsibilities.
* The client's obligations to the agency.
* Agency compensation.
* Ownership of advertising prepared by the agency.
* The term of the relationship.
* Termination of the relationship.

The exact content of each contract, as well as the specific wording of each provision, should be worked out with the guidance of legal coun- sel. Yet the advertiser and agency principals are competent and respon- sible enough to decide on the general outline of the formal agreement between their companies. The following paragraphs cover the essential elements that should be considered by these principals in reaching such agreement. Their understanding about each of these elements may then be summarized in a "memorandum of agreement," which may then guide the drafting of the formal agreement.

Products to Be Handled...

There should be a statement as to exactly what advertising accounts the agency is retained to work on. If there are peculiarities or restrictions, they should be clearly stated. For example, if new or developmental products are involved, they should be identified. If only some fraction of the total advertising activity for the brand or product is covered by the agreement (e.g., limited geographic area, or creative and marketing but not media placement) this should also be specified.

Agency Responsibilities...

The agreement should specify what the agency is supposed to do. Some- times the agency responsibility is simply described as the provision of those services customarily rendered by an advertising agency. In other instances, a more detailed listing of exactly what the agency will do is provided. This would include topics such as:

* The study and analysis of client products and the markets for those products.

* The study and analysis of distribution channels and methods and their relation to assigned products.

* The study and analysis of advertising media and the determination of which media are especially adapted to the marketing of assigned
products, considering their characteristics, markets, and methods of distribution.

* The development of specific advertising plans, including recommended creative approaches, as well as detailed media programs.

* The execution of the plan, when approved by the advertiser, to in- clude specifically:

--The preparation of advertising messages in whatever form and for whatever media the plan specifies
--The physical production of advertising messages for use in speci- fied advertising media
--The negotiation for favorable rates and the actual ordering of media space and time to carry the brand or product advertising messages
--The timely forwarding of advertising messages in proper form to specified media
--Checking and verifying that the advertising messages appeared as planned in the media space and time purchased in behalf of the client
--Confirmation of space and time charges submitted by the media and other authorized outside suppliers and payment of confirmed in- voices.

* Cooperation of advertising agency personnel with corporate employees not directly involved with advertising (sales, research and develop- ment, public relations, legal, accounting, etc.) to make advertising programs as effective as possible.

* Agreement by the agency not to act as advertising agent for products that directly compete with those included in this assignment.

* Agreement by the agency not to handle advertising accounts in a com- peting product category (e.g., automobiles or antacids) and/or any of the products of one or more specific competing companies (e.g., an agency of Procter & Gamble might agree not to handle any product manufactured by Lever Brothers or its subsidiaries).

* Agreement by the agency to act as agent of the advertiser in the purchase of services, including media services and materials required for advertising of the assigned products.

* Agreement by the agency to secure the advertiser's approval prior to committing expenditures for media, advertising production, etc. (Often advertisers require written approval for expenditure authori- zations in excess of a particular amount and permit verbal authori- zations for expenditures below the stipulated amount).

* Agreement by the agency to take reasonable care in safeguarding the security of the advertiser's property given to the agency, including all reports, documents, statistical data, and other material.

* Assurance by the agency that it will disclose its ownership position in any subcontractor it uses in satisfying the client's needs.

* Agreement by the agency to ascertain the ownership of photographs, art work, copyrights, or other property rights that it uses in behalf of the advertiser, and a promise to obtain appropriate re- leases, licenses, or other authorization.

* Agreement by the agency to carry advertising liability insurance or otherwise indemnify its client against expenses incurred due to legal claims arising from advertising materials prepared for its clients.

* Agreement by the agency to carry out particular kinds of research work. (Often this work is specifically required for the preparation and placement of advertising, such as copy pretesting and syndicated media research service purchase and analysis.) Client Obligations... The advertiser may agree to any number of obligations requested by the agency. For example:

* The client may agree not to hire another advertising agency to work on the advertising account for the brands or products covered by the agreement without first obtaining agency consent.

* The client may agree to provide the agency with as much information as it needs to function as an advertising agency and to provide whatever other resources and aid are required by the agency to pro- duce effective advertising.

* The client may agree that if advertising work in progress is can- celed by the client, it will reimburse the agency for its out-of- pocket expenses and appropriate service charges for the canceled work.

* The client may agree to determine the ownership of any material provided to the agency to use in its advertising and to obtain ap- propriate licenses, releases. or other authorization.

* The advertiser may agree to indemnify the agency against expenses incurred due to legal claims arising from advertising approved by the advertiser.

* The advertiser may agree to indemnify the agency from legal claims that arise from distributor or third-party use of advertising, based on union codes or contracts covering commercial usage and talent compensation for such use.

* The advertiser may also agree, usually at the agency's request, that it will not require the agency to prepare advertising that the agency believes to be either deceitful or unlawful. Agency Compensation... How the agency is to be compensated for its work should be determined in accordance with the following considerations.

* First, there will be an agreement as to how the agency is to be compensated for planning, producing, and placing advertising. --This may be by percentage commission. --Or by a fee. --Or by a combination of fee and commission. Whatever the arrangement, the advertiser will agree to it, and a description of this compensation agreement will be included.

* Second, there will be an agreement on the reimbursement of the agency for its out-of-pocket costs for material, services, travel expenses of agency personnel, etc. --If the agency receives no markup on such costs, the agreement should say so. --If the agency receives a percentage markup on such services, the agreement will specify what it is. (For example, 17.65 percent of the net cost equals 15 percent of total cost).

* The agreement may also specify how the client will qualify for cash discounts and how the agency will handle media rate adjustment.

* The method of compensating the agency for its participation in a cooperative advertising program, if it differs from compensation for agency service for other client advertising, will also be indicated.

* The agreement may specify how the agency will be compensated for special services not covered by the general agreement between the parties, such as package design, preparing of collateral material, or planning and executing special research studies, etc.

* If the parties agree to a minimum compensation or maximum compen- sation, this will be indicated.

* The agreement should specify what compensation the agency should receive, if any, when advertising created by the agency is placed in the United States, by a third party. Such third-party placement could occur when regional sales organizations, franchisees, re- tailers, wholesalers, or others are given permission to place adver- tising that was originally created by the agency.

* The agreement may also detail how the agency is to be compensated, if at all, when advertising prepared by it appears outside the United States.
* The agreement may also specify a time frame within which the adver- tiser is expected to reimburse the agency for its various expendi- tures made in the client's behalf.

Advertising Ownership...

Most agreements specify the ownership rights of the advertiser in advertising materials presented to it by the advertising agency. Usually, any material that is actually presented by the agency to its client becomes the client's property.

Term of Relationship...

The agreement may specify that the relationship between advertiser and agency will exist until canceled by either party. Alternatively, the agreement may remain in force for a specified time period--often one year--and then be cancellable by either party. The agreement also may be written so that it remains in effect from year to year, with a specified annual date on which either party may cancel.

Finally, the agreement usually states how the parties will notify each other of their desire to terminate and when notice of termination must be given. For example, the agreement might specify the 90-day notice of termination period that is standard in the industry.

Termination of Relationship...

In addition to agreement about termination notice periods, client and agency usually find it prudent to specify other details about how the agreement between them will be terminated. These may include the following.
* An agreement about how the agency will be compensated during the period of termination notice. Frequently, when the agency is compen- sated by commission, it is agreed that commissions will be paid on advertising placed for the advertiser during the termination period, regardless of whether it is placed by the terminated agency. Fee agreements usually remain substantially unchanged during the period of termination notice, although the agreement may specify that the advertiser reserves the right to reduce the agency service level (and thus the amount of fee compensation) during the period.
* The termination section may also specify the treatment of uncan- cellable contracts, subcontracted work in progress, and rate adjust- ments on advertising that has previously run.
* There may be an agreement about how the agency will return materials and other client property to the client.
* Finally, the agency may be asked to agree to cooperate with the new agency during the period of transition.

The discussions that lead to a basic understanding of the agreement between client and agency need not be lengthy or arduous. Many of the issues will be clear-cut at the beginning or may have been agreed on earlier in the agency search. (The basic method of compensation may have been a matter of such prior agreement. All finalist agencies may have agreed to the compensation method favored by the advertiser before becoming finalists, for example). In addition, many of the issues in the agreement have come to be covered by standard contract language. Such standard clauses are likely to be agreeable to both sides. Specimens of such clauses are readily available from such trade associations as the American Association of Advertising Agencies or the Association of National Advertisers. Frequently, too, the agency will have a standard contract of its own that can serve as a starting point for discussions.

The objective of these discussions is to develop an understanding as to how the advertiser and agency will do business together, as a final part of the agency selection process. That is why it is important for the principals to reach a broad agreement on these matters--before the actual agency selection is made final and publicly announced.

This resource is (c) 1991 by NTC Books, and is excerpted from
"Choosing & Working With Your Advertising Agency" by William M. Weilbacher.
To order the book, click below.

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