The Advertising, Marketing and Communications Industry: The Pace of Change Is Accelerating - Part II

Monday, May 1, 2006 - 01:00

Editor's Note: Part I of this interview appeared in the April issue of The Metropolitan Corporate Counsel.

Editor: Tell us about the relationship between marketers and their advertising agencies.

Urbach: The marketer is the source of the message and the agency is the creator of the message. Both have a liability to the regulator for the message. The allocation of financial risks and liabilities as between the marketer and agency is largely a question of the agency/client contract and the indemnification provisions. But it is important to remember that the discussion on how to handle indemnification should focus less on form and more on what is fair and reasonable based on a myriad of factors, including which party has the most knowledge and control over the issue. If the parties are able to remain true to that principle, the resulting indemnification terms will likely allocate risk fairly.

Risk is something that permeates the relationship: the business terms, the compensation, even the type of work to be done is analyzed in terms of the allocation of liability. And with the trend toward global arrangements, the complexities increase. One has only to think about how differently IP issues are addressed in jurisdictions across the world to realize how complicated the relationship between marketers and agencies has become.

The relationship between marketers and advertising agencies is also reflective of changes in the marketplace. The role of an advertising agency has evolved to reflect the needs of its clients. The agency is more than the repository of creative ideas that get translated into television commercials. Today, a marketer looks to its agency to communicate its brand to its market in a distinctive way. Marketers want agencies to be strategic partners in a process that delivers a first-rate, perhaps unforgettable message. We are witnessing some very unique and non-traditional campaigns: the Mini - "Forged Mini," Audi - "Stolen Audi", the California Milk Processor Board (Got Milk?) - "Aliens Stealing Cows For Milk?" and Burger King -"Chicken on the Web." As a consequence, agencies are looking for different talent, and this includes people who are both free thinkers and technologically proficient. At the same time, marketers are looking for greater efficiencies and reduced costs. Though technology allows agencies to do new things in new ways, for agencies in this climate the need to do more with less represents a difficult challenge. This has caused marketers and agencies and the relevant trade associations to focus on a fundamental question - how should marketers compensate their agencies? Up until this time, marketers have focused on how to reduce costs by looking to cut the costs that agencies incur and bill, time of staff, overhead and profit. But to a marketer, up to 90% of marketing costs are not agency fees, but media and other service and product costs. Both parties would be better served focusing on the real value of what agencies are creating and producing. Both parties should be working towards better value, and once this is achieved, paying for value will be the most cost efficient and effective step a marketer can take. If we get it right, it is a win-win for everyone.

Editor: What is the equation here?

Urbach: With value-based compensation, the benefit that a client receives from certain advertising or marketing materials is not related to the amount of time it takes to create and produce those materials. For example, if it takes a half an hour of time to come up with the line "Just Do It," should the agency be paid solely on the basis of time? I suspect that if that is the prevailing rule, the level of creativity will soon come to reflect that type of compensation. The model that is used in Hollywood is not based on cost inputs, and nor should it be. The question should always be which compensation methodology generates the best value for the client. This entails a combined legal and business analysis. Just as the output of agencies has changed from traditional paid media advertising, so have the ways in which agencies will be compensated for their efforts in the future. This discussion is well underway. We are working to make those fundamental changes a reality.

Editor: Where do you think we are going with the First Amendment as a defense against an overreaction of regulators?

Urbach: With an ever-changing United States Supreme Court, that is not an easy question to answer. We are not certain what the new Justices think about the protection of commercial speech. Some believe that this distinction is both arbitrary and unjustified. Place this discussion in the arena of the commercial marketplace - where speech is simply not clearly defined - and the line of distinction becomes more difficult to draw. Non-traditional public relations activity and media marketing are serving to sharpen the debate. As a result, there are going to be an increasing number of cases on what is or is not commercial speech and what is or is not protectable. This is particularly predictable in areas that are under increasing government scrutiny, such as food marketing and advertising practices as they relate to the societal problem of childhood obesity. When the government seeks to regulate advertising under the guise of protecting children, one key line of defense, and increasingly the first line of defense, is going to be the First Amendment.

Editor: What about the impact of an aggressive plaintiff's bar on advertisers?

Urbach: That is an important factor in the industry today. False advertising cases can be brought not only by competitors and by individual consumers, but also by groups of consumers as class actions. Increasingly, more and more consumer actions are being brought because the plaintiffs' bar realizes the substantial upside potential. Whenever a governmental consumer protection investigation is settled, it is quickly followed by a class action. There is a simple fact that drives this process - class action counsel can make a great deal of money in this area of the law. You cannot make much money as an individual consumer if one case is brought based on one 25 cent coupon. Multiply that coupon by 10 million people, and you are talking about serious money. This becomes less about consumer protection and policy, and more about the almighty American dollar.

Editor: And the FTC's impact on the industry?

Urbach: The FTC is an interesting regulatory agency. It is the main governing body at the federal level that regulates advertising practices. But, it is a small agency with a great deal of responsibility. Its resources are spread pretty thin. As a result, it communicates its messages in a variety of ways. The FTC will bring enforcement actions, sue companies, promulgate regulations and speak publicly on issues. It seeks out businesses proactively and sponsors forums on a variety of issues in which industry representatives participate. We are involved in two upcoming FTC programs on the use of disclosures in advertising. The FTC highlights hot topics of enforcement - privacy, identity theft, childhood obesity, fraud and others. As such, when the FTC comes after you or your marketing practices, oftentimes there are few who are surprised. It is important to be aware that the FTC has moved away from the model of dealing with an erring enterprise with a slap on the wrist followed by a signed consent order. Today, it seeks substantial money damages, which, of course, generates significant public interest and press attention. This has the effect of emphasizing its policy objectives in a very vocal manner, so the industry gets the message.

Editor: What is this going to look like ten years from now?

Urbach: I see a progression of change that is accelerating geometrically. Globalization is impacting everything we do. Our own work increasingly involves assisting domestic clients in expanding abroad, foreign companies looking to do business in the U.S., and advertising agencies and marketers in the business of collaborating to deliver brand messages worldwide. It mirrors how interconnected the world's economy has become. There is tremendous growth in China and India in particular, and these are markets that attract a great deal of attention from a client base such as ours. Many of the issues that we have addressed in recent years in this country are going to come to the fore - albeit in somewhat different formats - in the countries seeking to become full-scale members of the global economy.

When you go beneath the surface of the advertising business and take a hard look at the people who work in it, who create the messages and who utilize the technology to convey those messages, you realize how much it reflects our society and its aspirations. What permits our country to be competitive in the world marketplace is the freedom to communicate. It may be challenged by special interest groups and even, from time to time, the government. That is a reality that will be with us as we move into the 21st century because the freedom to speak is how we define ourselves as a people. The business of advertising and marketing will evolve in ways we cannot imagine today and marketers will reach their intended audiences.

Editor: Most in-house counsel lack media, marketing and advertising expertise. What should they be concerned about?

Urbach: Not many attorneys concentrate in advertising and marketing, and no firm has the breadth and depth of experience that ours has. This allows us to make uniquely informed judgments and practical decisions and to counsel our clients accordingly. We provide the value added benefit of not simply knowing the law, but also understanding its implications, enforcement practices and industry's reaction. That gives our clients the added dimension of the practicality of our advice. The bottom line is: turn to experts. It is far less expensive to obtain informed advice before the fact than to have it delivered in the form of an expensive litigation. Corporate counsel should not underestimate the impact of the law on what they do on a day-to-day basis. Almost every company has the need to communicate, market and advertise with its public, and how to do it creatively and competitively and what should be utilized to support the process are questions that should be carefully evaluated. Bringing in the right experts at an early stage to review and think through the issues with corporate counsel - to address the issues proactively - is the best advice.

Please email the interviewee at rurbach@dglaw.com with questions about this interview.