Law or Custom: The Practice by Advertising Agencies of Buying Media as Agents for a Disclosed Principal in the U.S.

It is a given that to completely understand a concept, subject matter, or anything really, is to try to understand its history. The practice by advertising agencies of buying media as agents for a disclosed principal (the advertiser) in the U.S., is no exception. 

When working on a media services contract that involves buying media in several global markets, local laws, practices or customs are examined to find out whether agencies bought media as agents for a disclosed principal or as a principals in such markets, to include the related appropriate language in the contract. This is important, not only for complying with applicable laws, custom or practice but also from liability and transparency perspectives. 

An advertising agency usually contracts with media owners as an agent for a disclosed principal and under sequential liability, a concept whereby the agency is only liable to pay the media owners when the agency is paid by its client for the media buys. Until the agency is paid by the client, the client remains solely liable for payment to the media owners for the media buys it made on behalf of its client. As an agent, an adverting agency must disclose to its clients the fees, costs of media, as well as any benefits received as a consequence of the buy, in a full transparent manner. This is currently the practice in the U.S. 

On the other hand, an agency buying media as a principal, is buying the media on its own behalf and is solely liable to pay the media owners itself and unless the contract states otherwise, is not required to disclose the costs of such media buys to its clients or any other benefit. This is rarely the practice these days in the U.S. as agencies are offering more transparency in their practices, and advertisers are demanding it.

Wikipedia’s History of Advertising and the Entire History of Advertising on Softcube Blog are fun quick reads to get some perspective on the history of advertising before delving into the concept of buying media as agent or principal. ADText provides a great reference on the relationship between advertising, culture, society, and history.  

"Egyptians used papyrus to make sales messages and wall posters.  Commercial messages and political campaign displays have been found in the ruins of Pompeii and Arabia.  Lost and found advertising on papyrus was common in Ancient Greece and Ancient Rome. Wall or rock painting for commercial advertising is another manifestation of an ancient advertising form, which is present to this day in many parts of Asia, Africa, and South America. The tradition of wall painting can be traced back to Indian rock art paintings that date back to 4000 BCE." History of Advertising, Wikipedia.

Advertisements in newspapers in the U.S. started appearing in the 1700's, when the first newspapers were published "and tended to carry messages in the form 'Just Imported—A Variety of Goods.' These ads contained few illustrations and seldom mentioned price. Brands were still unknown." William M. O’Barr, A Brief History of Advertising in America. "The first official paid television advertisement came out in the United States on July 1, 1941, over New York station WNBT (subsequently WNBC) before a baseball game between the Brooklyn Dodgers and Philadelphia Phillies." Television Advertisement, Wikipedia. 

The first known advertising agency in the U.S. was established by Volney B Palmer, around 1840. "In 1842 Palmer bought large amounts of space in various newspapers at a discounted rate then resold the space at higher rates to advertisers." History of Advertising, Wikipedia. In essence, this is the practice of brokerage but in relation to the advertiser, Palmer was acting as a principal when he bought media space from the newspapers and he was solely liable for payment to the newspapers. In his own advertising for his services, Palmer claimed to be "the duly authorized agent of most of the best newspapers of all the cities and provincial towns in the United States and Canada, for which he is daily receiving advertisements and subscriptions." History of the Advertising Agency: From Print to the Internet by Michal Wlosik. Even though Palmer may have indeed been the agent of the newspapers, had he failed to resell the space he bought, he would still be liable to pay the newspapers for it.  

"By the late 19th century, agencies operated as principals, buying media space and time and reselling it to advertisers, keeping what eventually became 15% of the gross as their compensation. The advertiser would pay the agency for the media space they ordered and had no further financial obligations; the agency took care of all the subsequent financial details in creating and placing ads. The agencies were solely liable for payment to the media for all contracted space, even if a client didn’t pay the agency. That’s how the principle of sole liability became the cornerstone of the fiscal relationship between advertisers, agencies, and the media for almost a century." Marcia Appel wrote in her article "Defining Moments Agency History, The Bankruptcy that Changed Agency Media Relations Forever and the Demise of the Sole Liability."

This sole liability concept was the standard practice that advertising agencies operated under until probably the early 70’s when advertising agencies started operating under sequential liability.

In the same article, Marcia Appel, refers to the Lennen & Newell bankruptcy in 1971 as the turning moment when the advertising industry started doing away, albeit slowly, with the sole liability practice. After Lennen filed for bankruptcy, CBS sued Stokely-Van Camp, a client of Lennen for the cost of advertisement that Lennen placed with CBS but for which Lennen failed to pay. Stokley had already paid Lennen and argued that it shouldn’t have to pay twice.

The trial court granted a summary judgment in favor of Stokely. On appeal, the summary judgment was reversed by the U.S. Second Circuit Court of Appeals and the case was remanded for a trial. Columbia Broadcasting System, Inc. v. Stokely-Van Camp, Inc., 522 F.2d 369 (2d Cir. 1975). On remand the trial judge was asked to decide whether an agency relationship existed between Lennen and Stokely according to the custom and usage of the trade, particularly the usages of the Madison Avenue advertising business.

After trial, the court found that no agency relationship existed between Lennen and Stokely and that "the custom and usage in the television advertising business was that agencies advised their advertiser clients that the advertisers were not liable to the networks but that the agencies were solely liable." Stokely. CBS Inc. v. Stokely-Van Camp, Inc., 456 F. Supp. 539 (S.D.N.Y. 1977). The judge, in reaching that decision, pointed out that agencies and their trade association actually insisted on sole liability and that the publishers (including CBS) accepted it. 

The practice of buying media as agent for a disclosed principal under sequential liability in the U.S. started to slowly get into media services contracts since the early 70’s and "[a] case can be made that sequential lability has become standard trade practice due to its inclusion in agency forms and the fact that no other single practice has superseded it to become widely used." Marcia Appel convincingly goes on to state in her article.

Buying media by advertising agencies as an agent for a disclosed principal under sequential liability instead of as principal is not the law in the U.S. but rather a practice that has been relied on continually so as to become the custom in the advertising industry.  

Bassam Messaike, Legal Director, Dentsu Americas

Edited by Miri Frankel Miller, Deputy General Counsel, Dentsu Americas