Ad Agencies on Defensive as DOJ Production Probe Widens
The Department of Justice's probe into ad agency production practices and potential bid-rigging is ramping up, putting even more pressure on an industry that just can't seem to escape scrutiny over its business practices.
Omnicom Group on Friday said two of its subsidiaries had received DOJ subpoenas, while Publicis Groupe said one of its subsidiaries had gotten one. The news came less than two weeks after Interpublic Group confirmed that one of its standalone domestic agencies had been contacted. A WPP spokesman declined to comment when asked Friday if the holding company had been subpoenaed.
"When the feds start issuing subpoenas, it's pretty damn serious. There are probably some nervous individuals in agencies right now," said Douglas Wood, senior partner at Reed Smith and general counsel to the Association of National Advertisers.
The Wall Street Journal first reported in early December that the DOJ was examining ad agencies for allegedly fixing bids by encouraging production houses to increase their prices so that contracts are awarded to agencies' in-house teams. If proven, the allegations could lead to fines and even prison time, according to legal experts. Leading the investigation is Rebecca Meiklejohn, who sent six executives to prison in the Grey/Color Wheel bid-rigging scandal in the early 2000s.
In-house production has emerged in recent years as a popular tool for agencies facing time constraints and financial pressures brought by the need for constant content creation in the digital age. The investigation could ultimately come down to how transparent agencies are with clients when putting external bids against internal ones.
"We need to see what the investigation uncovers," said Adonis Hoffman, who was VP and counsel at the 4A's from 2000 through 2010. "But agencies should be on notice that any practices that remotely involve the sharing of services within the corporate structure, and do not have a separate accounting framework approved by clients, are suspect."
"The problem lies not so much with the practice itself, but with a lack of transparency," added Mr. Hoffman, now chairman of Business in the Public Interest. "Thus, if agencies disclose to clients what their intentions are and discuss their business practices to those clients, we would not have this investigation or discussion."
One ad agency executive who spoke on the condition of anonymity said that the crux of the issue is, "If you have an in-house production within an agency and there is a triple-bid, who makes the ultimate decision with which production house to go with? As long as the client does it, there is clear transparency there, then you are fine."
The investigation comes two years after the Association of Independent Creative Editors, which represents postproduction agencies, raised transparency concerns about in-house agencies. "We regret that it's taken a probe like this to illuminate a practice we've raised concerns about for years, but if this results in a more level and fair competitive environment for independent postproduction and production vendors, then something positive may come from it," said AICE Executive Director Rachelle Madden. "Going forward, our focus at AICE will be on continuing to educate clients as to how they can best navigate the in-house landscape to get the most value and the best solutions for their money."