Who's responsible when bills go unpaid? Advertising agencies seek limitations on their liability

Folio: The Magazine for Magazine Management, May 1, 1991 by Tony Silber

NEW YORK City-advertising agencies have a new policy that limits their liability on unpaid bills for ad space. The new directive has some magazine execs concerned that they may be left holding the bag, an empty one at that.

The American Association of Advertising Agencies' long-standing policy had been that agencies accept sole liability for payment of ad space purchased from media. But during a meeting in early February, the 4As switched to sequential liability, whereby an agency is liable only if it has been paid by the advertiser. Until then, the advertiser is responsible for payment.

"I think the stakes have gotten too high for agencies to be solely liable for so much money," declares O. Burtch Drake, vice president and COO of the 4As. "So the membership feels that responsibility should lie ultimately with the advertiser if the agency isn't paid."

"Sequential liability protects the agencies from their clients going belly up," adds Roberta Garfinkle, print media director for McCann-Erickson. "Why should you expect the agency to be responsible for that?"

Although the policy is not binding, publishers find it unacceptable.

"I think the liability should rest with whoever places the business, because they should have the insight and the credit knowledge of the clients they serve," says John R. Miller III, publisher of Long Island-based Equal Opportunity Publications. Adds Miller: "There are times that the clients have paid the agencies and some agencies still slowpay. They use that as a stalling tactic to manage their own cashflow."

Miller thinks part of the 15 percent commission agencies receive for handling ad sales transactions should buy a guarantee to make good on insertion orders.

"There are times I feel I don't get my full 15 percent justification," he says. "There are times when agencies act just as paper shufflers."

What's also troubling for publishers is that with sequential liability, they're hostage to a transaction they're not even involved in.

"The billing from agency to advertiser is a future event over which we have no control and of which we often have no knowledge," says Donald Kummerfeld, president of Magazine Publishers of America. "That doesn't sound like sound business practice to me."

John Emery, president of the American Business Press, agrees: "It's really unacceptable. It leaves the publisher holding everything with no one to turn to."

Penton Publishing requires that agencies assume liability. "When the advertising is placed through an agency, and the agency is broker, in my opinion they take on some of that responsibility," says Chairman Sal Marino. "If we are in danger of not being paid, and the agency cannot pay for some valid reason, then we will try to collect from the advertiser. But in my experience, the advertiser has paid the agency, and the agency should be the one responsible."

Emery believes the only safe way to avoid non-payment is to make both advertiser and agency sign a space contract.

Drake says sole liability can put agencies in a no-win situation. "If an agency hasn't been paid, how is the agency going to pay a $1 million bill on its small capitalization?" he asks. "Yes, agencies are stiffed all the time by clients--I don't think that's anything new--but the stakes are getting bigger. "

Drake also claims--and publishers agree--that magazines will go after agency, advertiser and whoever else they can, no matter what the terms of the contract are, to gain payments they're owed. "That's the reality of the situation," he says.

Ultimately, this squabble might not mean too much because neither sole liability nor sequential liability are binding policies. Contract arrangements are always worked out among the individual advertiser, agency and medium. Even now, magazines don't always require an agency to accept sole liability, and broadcast rarely does, Drake says.

And some advertisers--such as Procter & Gamble--require that any agency it uses accept sole liability. "The agencies are proclaiming that until they are paid the liability lies with the advertiser. There's no indication that the advertiser will accept that," Kummerfeld points out.

MPA is polling its members and developing an official position. "My prediction is that we will not end up agreeing to sequential liability," Kummerfeld says. "We may end up agreeing to disagree. "