Agencies Beware: Culpability Potholes Ahead

FTC's Updated Guidelines, New Court Precedents Indicate Firms Must Step up Due Diligence in Their Work

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Adland, long-shielded by its bigger, more powerful clients, has reason to worry about potential exposure for agencies when it comes to false-advertising claims.

While naming agencies as defendants in lawsuits alongside advertisers is a practice that died out somewhere between the 1970s and early 1980s, legal experts point to the Federal Trade Commission's update of green-marketing guidelines this past fall as one sign of stepped-up government scrutiny of the agency community.

A recent false-advertising case between LG Electronics and Whirlpool
A recent false-advertising case between LG Electronics and Whirlpool

The update dictates that agency as well as client can be held responsible for false claims. What's more, new precedents being set by the courts suggest that the treatment of communications between a marketer and its outside agencies as something akin to attorney-client privilege may be a thing of the past.

"The idea that an agency is responsible for the content that it creates for a client is a lesson that is sometimes forgotten," said Ron Urbach, chairman of New York-based law firm Davis & Gilbert, which for decades has been an adviser to many of Madison Avenue's biggest players.

"It's basic law that exists, but often times agencies get so caught up in the negotiation of an agency-client agreement ... they forget that independent of that contract is what the government requires. And the federal government requires that an ad agency has a responsibility to make sure that the advertising is compliant with the law."

The FTC first issued its Green Guides in 1992 as a way to assist marketers unsure of whether their claims were accurate. Since then, the guidelines have been revised several times, most recently last year when the FTC was met with some consternation from the American Association of Advertising Agencies.

Said Dick O' Brien, head of the 4A's Washington office, last December: "We believe that our own self-regulatory efforts and the existing regulations meet most of the concerns expressed by the commission in their new proposals. Green marketing is fragile and can be harshly affected by too many rules that make it almost impossible to discuss the environment benefits of products and services."

Beyond the Green Guides, the FTC also appears to be taking more seriously its ability to file "administrative complaints" as an issue of public interest when it believes the law is being violated. In a recent example, it charged and won a settlement from a public-relations agency hired by video-game developers. The FTC claimed the firm, called Reverb Communications, engaged in deceptive advertising by having staffers pose as ordinary consumers posting game reviews at the iTunes store, and not disclosing that those reviews were done by paid employees working on behalf of the developers.

"One of the ways the FTC tries to effect policy is by taking individual actions against individual players," said Mr. Urbach. With those actions, "they are trying to really speak to the industry. In some recent actions where they have gone after agencies, they've sent a reminder to the industry to say, 'Don't forget you have a responsibility to comply with the law, and you can't hide behind the client.'"

Legal experts note the feds aren't the only reason agencies should step up their due diligence. In a recent false-advertising case between LG Electronics and Whirlpool -- over the use of the word "steam" in ads for clothes dryers -- LG during discovery asked for correspondence between Whirlpool and its ad agency. The latter company refused on grounds of legal privilege. But a U.S. Court of Appeals mandated Whirlpool turn over documents, and that the third-party agency wasn't protected as the functional equivalent of a Whirlpool employee.

"Agencies used to work with the legal departments of advertisers pretty closely, exchanging information back and forth about how the product works, shortcomings in performance, whether the ad is accurate or overstating the benefits," said Chris Cole, a partner in the firm's Washington office Manatt, Phelps & Phillips. "All of this happens over email for the first part ... pretty candid communications. Frequently when we're in cases, some of the worst documents come out of agencies. They're more freewheeling, throwing out ideas that may or may not work, and sometimes come up with initial ideas that are off the charts in terms of being false. It's not until the lawyers intervene sometimes that an ad can be aired that is truthful and not deceiving to the consumer."


Four things agencies should consider to better shield themselves against claims.

  • Internal education on a regular basis to make sure new hires know the rules about communicating over email, text message or otherwise.

  • Establishing internal processes for due diligence to be able to trace whether the agency is meeting federal guidelines for advertising or not.

  • Don't trust broadcast networks or clients' approval of advertising; make sure it meets your own standards.

  • Ask clients for the ability to work on site, and/or for a company email address.

Source: Manatt and Davis & Gilbert

The legal trends are ones that some in the agency community are flagging as worrisome -- and not merely because of the potential financial burden and time-suck posed by an inadvertent courtroom showdown, but also due to fears that such legal precedent could hamper agencies' creativity.

"Further regulation and over-reaching by the government will cause agencies, and in particular creative people, to be less inventive and look over their shoulder more," said Peter McGuinness, the CEO of Interpublic Group of Cos.' Gotham and a member of the 4A's government-relations board. "It will fundamentally impact how we do business, because we're always pushing advertisers to be more aggressive, but [legal concerns] will ultimately cause us to dial back, water down and make agencies more risk-averse than they already are. You can't do a middle-of-the-road campaign and then be expected to steal share."

It's a trend that would likely leave a bad taste in marketers' mouths, too. Already, beverage maker Pom is fighting back. In a turn of events, the marketer sued the FTC last year alleging that its new advertising standards for the food industry have not given companies a chance to submit input and that it's violating First Amendment rights to engage in truthful speech, and harming the company's brand association as a healthful-juice company.

For now, the best agencies can do is be cautious. And at the end of the day, a little paranoia could go a long way in terms of helping an agency avoid an unnecessary headache.

"The most clear direction is one that would apply to any company, irrespective of an ad agency, and that's to be really careful what you say in electronic communications, whether in an email or a text message," advised Mr. Cole. "It can be retrieved after the fact, and it could come back to haunt you."

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