What is the Definition of Advertising Contracts
For many businesses of all sizes, it might be common to have a contract or agreement that will be signed between themselves and another party. For most people, contracts are everyday occurrences. Most people don’t think of contracts as formal, outlined documents in which each party must abide by all necessary conditions and terms in order for the contract to be enforceable.
Essentially, the definition of a contract is the following: a breach of an enforceable agreement. Most contracts that people use tend to be a form of real estate lease agreement or maybe a nondisclosure agreement. Advertising contracts are much different than other contracts because of their intended purpose of establishing a relationship.
The nature of an advertising contract is simply an agreed-upon business transaction effectuated by at least two parties. Advertising contracts are important because they can give businesses leverage over their competitors. Advertising contracts are common because companies generally will want to enter into a contract with either an advertising/sales agency or a promotional firm that has a well-established reputation .
Advertising contracts intend to create a legally binding obligation on behalf of both parties but only if they are subject to all requirements to make the contract valid and enforceable. Generally speaking, advertising contracts only require one party to fulfill its obligations in order for the other party to receive their benefits. This means one party cannot ask for a specific form of delivery if it doesn’t exist.
An advertising contract is merely an invitation to treat. Essentially, this means an advertising contract provides an invitation to treat from one party to the other. The advertising contract is simply an offer to induce the other party into a legally binding agreement. Sometimes the advertising contract is offer and acceptance simultaneously. Although advertising contracts are intended to create legally binding agreements, they do not create any legally binding agreements unless all of the conditions of a contract are fulfilled.
Key Essentials for a Typical Advertising Contract
The inclusion of parties, campaign objectives, duration and payment details are just a few important elements you should be aware of.
Parties – The contract should identify all of the parties involved in the advertising contract (the "Parties"). The contract should clearly state who is the publisher (the entity providing inventory, traffic, or both), and who is the buyer (the entity who is buying the inventory, traffic or both). The agreement should also include an "Exhibits" section which provides the publisher’s website url, the website url of each of the advertiser’s websites where the advertisement will appear, the size of the advertisement, the placement of the ad, the start and end date of the advertising, the url for the target traffic, the frequency of when the ad appears, and an area for general comments addressing any other material terms.
Advertising Campaign Objectives – The contract should set forth the objectives of the advertising campaign (the "Campaign"). The Campaign objectives should clearly set forth the expectations of the Parties as to the volume or frequency of exposure of the ad, the geography of the ad, the duration, etc.
Duration of the Advertising Campaign ("Campaign") – The duration should clearly set forth the timing of the advertising Campaign and its termination date.
Payment Terms ("Compensation") – The compensation section of an advertising contract is one of its most important section as it sets forth how the compensable events for the advertising party will be determined. The Parties will need to be clear on how they will measure the compensable events (e.g., traffic to a specific URL, # of impressions, # of clicks, etc.). Based on the type of events, the compensation will be calculated. Most compensation is pre-determined. The Parties will agree upon a flat however, Parties may agree to a revenue share model where the Publisher receives a percentage of the net profit the Buyer has made on the traffic it received on their website. This will require the Buyer’s cooperation as to how the net profits are calculated.
Standard Provisions Found in Advertising Contracts
In addition to defining the scope of the relationship, advertising contracts will include clauses that address revision rights and termination conditions. Licensing agreements typically reserve the right for revisions of work based on a client’s budget, deadline and extent of changes. These type of agreements may include provisions for additional charges if the revisions are extensive or more expensive than the work originally agreed upon.
Termination conditions will set forth the various ways a client or an agency may terminate the advertising contract. The agreement may provide for three categories of termination: termination for convenience, termination for cause without notice, and termination for cause with advance written notice. The termination provision may also address the final compensation that will be paid to the agency and the reimbursement of agency costs and expenses to be paid by the client.
Advertising contracts may also include confidentiality agreements and indemnification clauses. The client may want a confidentiality clause because the advertising agency will be privy to sensitive company and financial information. Or, the agency may require a clause that protects its concepts and ideas from being used prior to a Contract being executed with the client. Indemnification clauses set forth an agency’s, client’s or both party’s responsibility for claims of infringement, fraud, death or personal injury. Indemnification clauses have become the most litigated contract provision for advertising agencies.
How to Negotiate Advertising Contracts
Negotiating advertising contracts requires an understanding of what terms are negotiable and the strength of your business’ bargaining position. Parties are free to agree to whatever terms they wish (within the bounds of public policy and other limits), but that doesn’t always mean that the terms are fair or balanced. Many smaller advertisers or ad agencies will simply accept the terms set by publishers and others in the industry as a condition of doing business. However, when large sums of money and legal liability are at stake, advertisers should scrutinize the terms of their advertising contracts, understand the risks involved, and be willing to negotiate. The time spent doing so could save millions, or even prevent a multi-million dollar lawsuit.
Terms generally open to negotiation include:
Particularly for larger ad buys, if the advertiser is not satisfied with the terms, he or she should not hesitate to push back and attempt to negotiate the contract. Many parties are willing to remove onerous provisions from the contract, or to otherwise address an advertiser’s concerns, in order to get the deal across the finish line. A publisher may be unwilling to remove a provision that is standard in its contracts, or that it believes is necessary to protect its interests, but it may be willing to discuss a limited carve-out of sorts in order to assuage the advertiser’s concerns. This is typically the case where the advertiser is a key client or where the advertiser is in a strong bargaining position.
Advertisers should be aware that laws vary from state-to-state, and in some cases require a publisher to accept the most favorable terms offered to a fellow advertiser anywhere in the country. Best practices call for ads that are lawful in the jurisdiction of the advertiser, and that are not deceptive or misleading. But, unless the parties are in litigation, there is limited incentive for the publisher to negotiate for more restrictive terms than this.
Statutory Implications and Regulatory Considerations
When drafting and signing advertising contracts, legal implications and compliance issues should always be top of mind. This is particularly important because advertising is highly regulated by both federal and state laws, so any ad that is not compliant with the law presents liability risks not only for a party’s business, but also for its personal assets .
Contracting parties should always consider questions 1 – 3 below as they draft their advertising contract (and they should always discuss that topic with a lawyer before they sign!):
- (1) Is the advertising contract in compliant with all other advertising laws and regulations and/or advertising policies and procedures, including, without limitation, those imposed by the Federal Trade Commission, the Better Business Bureau, and states’ attorneys generals?
- (2) At least prior to signing an advertising contract that gives rise to liability for the actions of others, does the advertising party have indemnity rights against the non-advertising party if the advertising party suffers any losses related to the advertising party’s own actions?
- (3) If the advertising contract pays a rate or commission based on the advertising party’s revenues, does the advertising party have the right to audit the non-advertising party’s books to ensure that the parties’ use of the advertising contract has resulted in any proper revenue being reported?
Best Practices for Advertising Contracts
The partnership with counsel should not end once the contract is signed. It should continue throughout the duration of the agreement. Contract management includes yearly review and analysis of advertising agency compensation and other aspects of the contract, either in-house or with agency or outside counsel, along with an evaluation of the agency’s performance to determine if that compensation is warranted. The review should address, among other processes: The contract’s expiration date, which often is dependent on the amount of billings. This information provides a rudimentary timeline for drafting a replacement agreement, if necessary. The relationship with the advertising agency, including a candid assessment of its creativity, analytical ability, performance, and accomplishment of the goals set for them. This is a critical assessment to help determine if the agency contract should continue, end or be modified. Since there usually are contractual termination rights with some advance notice, an assessment years prior to the expiration of the contract often will help avoid significant transition interruption costs. The actual billing, regardless of its amount, requires a review to determine if it is consistent with the contract, including any change orders for amounts that may or may not be contractually allowed. A comparison of the actual billing to the agency’s initial projections and subsequent revisions is an important aspect of contract management, regardless of the type of compensation plan. Many contracts for advertising services are very old. As a result, they do not address the current legal environment. Contract management reviews should include a determination as to how the existing contract dovetails with current and changing laws and regulations, as well as market trends. In addition, the review should include what state of the art approaches apply to the subject matter of the advertising service; whether similar contracts are in place in the industry and the terms therein; and emerging areas of advertising law that could impact the contract. It is advisable to work with an attorney when doing this analysis.
Case Examples of Disputes Over Advertising Contracts
1. Dispute Over Definitional Language
In one recent court decision, Brookside Agra LLC vs. Entercom Communications, the judge found that a certain definition of "cable" included "satellite services." Our takeaway: play it safe. 700 McLendon, the advertising agency in question, got into a dispute with their client, Brookside Agra, about a contract between the two that allowed 700 to advertise BSA’s product on radio. The problem was that BSA thought the words used in the contract only permitted "terrestrial" (i.e. ground based) advertising, whereas 700 thought they could include "satellite" or "television" advertising. Here, the use of imprecise language in the contract (like the term "cable") led to a dispute and ultimately, the court had to decide whether the language meant television or satellite services might also be included. When drafting advertisements and contracts, don’t skimp on language that may prove to be important later in trial when you’re battling it out in the courtroom.
2. Pushback About Outdoor Advertising
In yet another case involving outdoor advertising called InFocus Distribution Group Inc vs. 118th St. Outdoor, the plaintiff made a verbal contract with the Defendant, 118th Street, for advertising in New York City airports. In the agreement, the defendant agreed to provide the plaintiff with advertising space in exchange for the plaintiff representing 118th Street’s interests for outdoor advertising. Once the plaintiff tried to put up advertising in the airports , the defendant apparently refused to allow them to do so. The trial court found that the defendant had violated a New York City ordinance (a large advertising firm can’t grant its ad space to a smaller advertising firm) but later withdrew its decision on the basis that the decision had been precluded by its consideration of the oral contract. The court ruled in favor of Defendants in this case because the City ordinance barred the plaintiff from subletting advertising space, and thus, the agreement would have been illegal. I bring this case up to show how important it is to note the governing body(s) applicable to your contract. In this case the plaintiff should have some research into the laws concerning advertising in order to be aware of potential obstacles.
3. Stolen Ideas
This pattern is important to note for anyone drafting an advertisement in today’s marketplace. This type is known as the "Scales of Justice" lawsuit (as it involves a lawyer) and comes out of an Illinois federal court. In this case, a lawyer got an idea for an advertisement that was then aired on a television station using a very similar "Scales of Justice" motif. However, the court cleared the defendant of any liability. Why? Because as the judge in this case found, the lawyer was unable to show that his idea had been copied. This type of case shows us how important it is to get everything in writing.