A number of West Coast ad agencies are threatening legal action to get the fees they say start-ups owe them while start-ups turn to euphemisms such as "zero-based marketing," "taking a breather" or "going on hiatus."
Preliminary contacts and meetings are under way between agencies and clients involving three situations surrounding agency compensation, says John M. Anderson, chairman of the advertising and marketing practice for Heller Ehrman White & McAuliffe, San Francisco. The law firm represents a number of advertising agencies.
BREACH OF CONTRACT
The first situation involves dot-coms and start-ups that agreed to pay agencies a large fee in equal installments, such as monthly payments over a year. In about half a dozen instances affecting California shops, dot-com clients said they no longer needed marketing services and, therefore, would not pay the fees, he says.
There already is the precedent of one such case involving a non-dot-com. Italia Advertising, Universal City, Calif., brought suit July 12 in California Superior Court in Los Angeles County against the National Supplement Association, Golden, Colo., for its Experimental & Applied Sciences health supplements brand.
Italia says it was hired under a $200,000 one-year retainer agreement to be paid in equal payments of nearly $16,700 a month. The agreement later was raised to $400,000 a year at the rate of $33,333 a month. The company in May notified the agency it was on a 45-day so-called probation notice and the retainer payments would be discontinued.
AGENCIES FEEL STIFFED
A second area of compensation disputes involves about eight California agencies and 20 dot-com clients. In those instances, agencies believed they were stiffed for the 90-day termination fee, says Mr. Anderson, an important issue for agencies.
In the first few months of an agency/client relationship, the agency spends "way more than you're getting. You make money 15 to 18 months down the road," says Mike Sheldon, exec VP-general manager, Deutsch, Marina del Rey, Calif.
Mr. Sheldon says he had no difficulties with dot-com clients because he had client money up front as well as access to a bank line of credit from the dot-coms.
In a third grouping, some agencies were promised various forms of equity as part of their compensation, Mr. Anderson says, provided the agency met certain marketing goals, such as signing up a specified number of customers. In these instances the client has, in effect, terminated the agency before allowing it to have the opportunity to achieve the goal and to gain the equity.
WHAT'S A CONTRACT?
Mr. Anderson declines to give specifics, saying a number of agencies were in the process of trying to negotiate settlements. Some of the dot-coms, he notes, are in a bind.
"[Dot-coms] don't want the world to know they're out of an agency. It hurts their chances to find financing and customers," Mr. Anderson says.
A number of his agency clients involved in the disputes expressed concern about their dot-com relationships.
"A lot of clients wouldn't recognize a contract if it hit them in the eye," says Wayne Buder, president of Odiorne, Wilde, Narraway & Partners, San Francisco, in talking about dot-coms.
Being told by a client there's no money with which to pay the bill isn't enough, he says. However, his agency is trying to settle without costly and time-consuming legal action.
Until it "gets what's rightfully ours," Mr. Buder says, the agency is considering withholding work.
Mr. Buder declines to specify which clients are involved. The agency's dot-com clients have included Salon.com, whose advertising is on hiatus; Fogdog, which says it is still actively advertising even though it's trimming $5 million from its $20 million marketing account in the third quarter; and Half.com.
Half.com was billed as a $15 million to $20 million account when it was announced in January. But the used-goods trading site, which eBay in June agreed to acquire, never formally signed a contract with Odiorne and "agreed to mutually end the relationship due to the fact (that) our offline spending is almost nill," a Half.com spokeswoman says.
'OUT THE WINDOW'
Other agency executives have a different perspective.
"Ninety days doesn't mean anything," says Jack Boland, president, Pickett Advertising, San Francisco, adding that ad agencies have little recourse when dot-coms tell them they have no money to go forward. "Termination fees are out the window."
The compensation issue is the latest financial hurdle agencies face with dot-coms in the new economy. In the early stages of the boom, agencies realized they needed to obtain up front money for media, production and other out-of-pocket expenses. Some agencies, however, didn't have systems in place early enough. Among those struggling with clients is FCB Worldwide, San Francisco, currently disputing payments with client AthletesVillage.com, a 9-month-old site for sports enthusiasts.
Fred Goldberg, chairman of GMO/Hill Holliday, San Francisco, cautions that the first sign of disease is when a dot-com client decrees branding irrelevant. The client switches to promotional advertising, "anything to get hits on the site," he says. "When that fails, they say they're sorry, no more fees.
"They decide to do marketing some other way, by moving the general ad budget online or by signing up partners or by some other magical methods," he says.
George Fertitta, president-CEO of Margeotes/Fertitta & Partners, New York, says he and his dot-com clients have had more flexible partnerships than relationships bound by rigid contracts.
For instance, Margeotes helped launch About.com last year with an estimated $20 million ad campaign. It now works with About.com on a project basis, as the portal does most of its advertising in-house.
Another client, iGrandparents, had trouble getting funding, so the agency allowed it to take a "breather" or change in compensation until it could get up and running again, he says.
"We've had good experiences with the dot-com world," Mr. Fertitta says, adding that it's been careful choosing clients, only pitching 10 of the 40 dot-com companies that approached the agency. "We've been pretty selective with whom we work. I've heard horror stories."
Have agencies learned their lessons from the dot-com fallout?
"By (the) nature of the business, people in it tend to be optimistic," says Pickett's Mr. Boland. "That's why the business is in the shape it's in."
Contributing: Patricia Riedman.