Letter of Agreement Best Practices

Advertisers: Are You Insulated from Supplier Bankruptcies?

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RisksThe current advertising ecosystem is fraught with risks as the number of intermediaries servicing advertisers and their agencies continues to grow. The recent Chapter 11 bankruptcy filing of demand side platform MediaMath serves as a subtle reminder of these risks. At the time of its bankruptcy filing, MediaMath owed several hundred of its creditors between $100 million and $500 million.

To protect their investment from the impacts of this type of event, U.S. advertisers should consider implementing the following two contractual safeguards:

  1. Incorporate a “Sequential Liability” clause into agency/ intermediary agreements.
  2. Require agency/ intermediary partners to secure sequential liability protection in agreements with all third-party vendors.

Beginning in the 19th century, the advertising industry operated on the principal of “Sole Liability.” Where agencies acted as principals, buying media and reselling that to advertisers for a 15% commission. Advertisers in turn would pay their agencies for the authorized/ ordered media. Agencies were solely liable for payments to the media… regardless of whether a client paid them or not.

This approach began to evolve in the 1970’s following the high-profile bankruptcy filing of ad agency Lennen & Newell, which closed their doors owing a few million to media sellers. What precipitated the change? CBS, which had been unpaid by Lennen & Newell sued one of the agency’s clients to recover their funds, even though the client had paid the agency for the media ordered. While CBS ultimately lost the lawsuit, it set the stage for robust dialog among industry stakeholders about “who” was ultimately liable for payments to the media.

Enter the concept of “Sequential Liability,” which is endorsed by both the 4A’s and the ANA. In short, the agency is liable for payment to the media if and only if they have been paid by the advertiser. In turn, if the advertiser has paid the agency, they have no further obligation to the media seller.

Thus, for advertisers, establishing sequential liability as it relates to third-party vendor payments protects them from the failure of any agency or intermediary when it comes to paying their vendors, for which that intermediary has already been paid by the advertiser. In short, advertisers are only obligated to pay once.

However, advertisers must also require their agencies and intermediaries to provide notification of any third-party vendor that will not recognize the principal of sequential liability when transacting business on its behalf. By way of caution, media sellers (for instance) often incorporate “No Sequential Liability” or “Joint and Several Liability” clauses into their agreements or purchase orders with agencies which contradicts or disallows this important advertiser protection.

While properly screening agencies and intermediaries in terms of their financial health can dramatically decrease an advertiser’s risks, these contract clauses will offer an additional layer of protection.