What is an Advertising Contract?
An advertising contract can generally be defined as a contract into which two or more parties enter with the intention of one party creating advertising materials and then distributing them to the public to promote a product, service or event.
Advertising contracts can cover any number of relationships, including:
- Traditional advertising agency-client relationships
- Relationships between artists and publishers
- Relationships between venues and production companies
- Relationships between digital game producers
- Relationships between social media and advertisers, or social media platforms and content producers
- Relationships between independent content creators, or contract employees within larger companies and the bigger company’s IMDB profile.
Broadly, the parties in an advertising contract can include a client, advertiser, ad agencies, venues, publishers, sponsors, advertising-supported platforms, application and video-game developers, or between a company and its independent contractors.
The elements of an advertising contract will depend on the relationship between the parties:
- Contracts that define relationships between advertising agencies and clients are likely to address intellectual property rights in advertising content, control over advertising content, and payments to agencies .
- Contracts between a venue and a production company might detail the availability of space, distribution of profits, and what happens to the physical copies of the work.
- A contract between a publisher and an artist or author may address royalties, copyright ownership, distribution rights, and work for hire provisions.
- Contracts between publishers or public markets and advertisers will most likely address payments and services rendered by the advertising outlets.
- Contracts between a producer and a social network or advertising-supported platform will include provision for displaying the advertisement material, payments, and revenue sharing.
- Finally, contracts between companies and their employees may outline issues like scope of employment, proprietary information, and/or termination.
Contract scope will also inherently limit or prohibit the dissemination of advertising by boundaries of geography and/or time. The language of the advertising contract may limit disseminate the advertising only in certain areas of the world or during a certain time period. Some advertising contracts may have only have a lifetime of one advertisement.
In the end, while the specifics of an advertising contracts will vary from entity to entity, generally, they can be described as contracts delineating terms, obligations, and the scope of rights between parties involved in the disseminating of advertising material.
Essential Elements of an Advertising Contract
While the details of an advertising contract will differ on a case-by-case basis, the following components should generally be included:
Scope of Work. The scope of work outline should clearly identify the services to be performed by the advertising agency. For example, the scope of work may delineate the services over which the advertiser retains creative and editorial control from those for which the agency has full control. The scope of work may also consist of a detailed description of each task the agency will perform.
Payment terms. An advertising agency may charge an hourly rate or a flat fee per project, and whether the agency is paid in advance. The parties should also be sure to include any contingencies such as additional costs that may lead to increased payment amounts.
Deliverables. The contract should specify what products the advertiser will receive in return for payment, along with any project milestones or deadlines.
Dispute Resolution. Advertising contracts are enforceable under state contract law. In the event of a dispute, parties cannot resort to federal law unless a federal question is present. However, the default rule is often inconvenient for advertisers and agencies because the forum and substantive law may differ based on where the parties are domiciled. Agencies should consider requiring any disputes regarding a client’s advertisement to be resolved through private arbitration.
The Legal Side: What’s Your Responsibility?
The legal obligations and responsibilities of each party in an advertising contract include the duty to ensure compliance with all applicable advertising standards and legislation, and the safeguarding of intellectual property rights. Compliance with advertising standards can be achieved by carefully specifying the type of advertising method (television, print, or otherwise) as well as the message. For example, in order to avoid any potential liability for misleading branding and packaging, the contract let should clearly stipulate that the advertisements are not intended to, and in fact do not, approve or endorse any of the advertising, branding, and packaging. Any breach of the contract provisions would state that the advertising agency would, upon request, return to the advertiser all materials created in connection with the productions, and for the purposes of preserving the advertisers pre-existing rights, all intellectual property rights over the advertising or other materials shall be held by the advertiser unless the advertising agency was allowed to retain them for its own purposes. Further, if the advertising and marketing campaign involves photographs of people and specifically the use of celebrities, it is imperative to have the consent of any celebrity increased for a specific period and on the basis of a flat fee rather than royalty, in order to avoid disputes over use after the expiry of the contract. In addition, the contract typically provides a clause that both parties have the duty to indemnify and hold harmless the other party, and their directors, officers, and employees from and against any loss, liability, or expense resulting from the other party’s breach of any representation, warranty, or covenant contained in the contract. Therefore, depending on which party is responsible for executing the contract, the indemnification provision can vary. In the case of a creative service contract, where the agency hires companies to carry out certain tasks, the brand and creative agencies can be liable for the costs of their companies, leaving the client responsible for the losses suffered by those companies at the request of the advertising agency. Finally, having the contract dispute settled by arbitration, will ensure a quicker and more efficient settlement of the dispute.
Common Mistakes to Avoid
In the fast-paced world of advertising, ambiguities in the terms of an advertising contract can lead to serious disputes between the parties. The following are some of the more common pitfalls seen with advertising contracts: The Solution: As stated above, because an advertising contract often times involves multiple parties, it is important to spell out the entire scope of services to be provided and consider all foreseeable scenarios. Both advertisers and agencies should spend meaningful time in vetting the contract so that they know exactly what it is they are getting. Advertisers should ask themselves: "What exactly am I looking for?" "How will I measure ad success?" "What deliverables will the agency need to provide to me?" Once you have answers to these questions, you can better evaluate what a contract should include. Agencies should do the same. There is no question that advertising is mostly about creative. However, it is also important to establish that both parties will be required to abide by certain ethical and industry standards. Beyond complying with general trade or self-regulation rules, advertisers and agencies may choose to impose stricter standards on each other or on third parties. These could include restrictions on use of offensive language, respect for user privacy, and stringent guidelines regarding the use and/or disclosure of confidential information. The Solution: Consider what ethical or industry standards are most important to you and your business. Determine whether those standards should be included in the agency agreement (and if you have any particular concerns with respect to those standards, it is advisable to memorialize those concerns in the contract). Finally, depending on the standards you impose on the agency, you may also need to impose those standards on third parties that might have access to or use some or all of the creative work product (e.g., a print vendor). In many cases, an advertiser will engage an agency to produce advertising. The advertising may involve a variety of media (e.g., television spots, digital, social media, etc.). The remedies available when an agency has breached or violated the contract terms will depend on the agency’s scope of work under the contract. For example, would a breach of a reporting obligation affect how the agency is paid under a fee-for-services model? Is there a retainer? Is the agency paid on a commission or a cost-plus basis? One other key consideration is whether a breach or violation of a contract term can be properly quantified and whether such quantification would have a meaningful impact on the parties’ business relationship. For example, would an accurate accounting identifying a breach of an agency’s reporting obligation require the agency to refund a comparatively small fee based on an accurate accounting? Would a proper analysis of the extent to which the agency has protected a client’s proprietary and confidential information take away resources that could go towards the agency’s other clients and business? The Solution: The parties should each consider in advance the most likely and most undesirable of breach or violation scenarios, and then determine whether a particular type of breach or violation can be reasonably addressed via a negotiated remedy. For example, how will the parties deal with a breach of a reporting obligation, violation of a confidentiality provision, or unauthorized disclosure? The parties should also be prepared to address adequate remedies for the inability to timely deliver creative work product.
How to Negotiate the Best Advertising Contract
The objection of negotiation is to obtain the agreement on a contract that satisfies all parties. Even if you are using a form contract, the terms and conditions in that form represent the interests of the issuer. Modifying that form, even to your own benefit, may be resisted by the issuer. The first defense is to provide a legitimate basis for the changes you seek. An example is how online ads work. The seller may have access to the sites on which the ads ran when the ad ran. Providing evidence of the locations where the ad has been may be needed to show that the ad campaign was more successful than the seller claims, and therefore worthy of more payment. If you always specify that you want your advertising contract to include ad analytics and geo-targeting, in advance of the campaign, then you can still obtain the data no matter what campaign you signed up for.
However, if you are asking for something that seems unfair to the seller, or unexpected, the seller may resist your proposed changes . Pointing out that the change is for your mutual benefit. For instance, if you ask for immediate compensation rather than at the end of the campaign, explain that the cash flow benefits both of you – you don’t risk the exposure of a large sum of money, and the seller knows you’ve paid.
Sometimes, you will need to compromise. When that happens, point out the mutual benefit of the changes you are agreeing to. For instance, if you have agreed to pay a higher fee but only for ad placements in a particular zip code, explain that this is beneficial for both you and the seller. The seller knows that the ads will not go elsewhere and you have a sense of ownership over them, making it more likely you will get good results.
Finally, nothing is more helpful than a clear and specific proposal for both parties that can be easily understood as they come to agreement on the terms. Whenever possible, refer to specific terms and conditions in the current contract or provisions of law and how they are affected by the change in terms you seek.
How to Get Out of an Advertising Contract
Contracts can be terminated after the contractually agreed upon duration has elapsed, with the agreement of both parties, or for cause. Reasons that are considered good cause for terminating an advertising contract include serious violations of contractual terms, repeated violations of minor terms, serious moral turpitude by the advertiser, business loss or bankruptcy by the advertiser. Depending upon the contractual language, early termination may or may not be allowed if the contract has covered this eventuality.
If an advertising contract contains a cancellation clause, the parties must follow the procedure set forth in the contract for notifying the other of such termination. This is especially important for contracts with lengthy durations. These contracts may involve substantial sunk costs for the party handling the advertising campaign, and an extraordinarily large advertisement may need to be remade. The publisher may need sufficient time to recover from any cancelled run of space.
The cancellation policy in the advertising contract may allow termination without notice or upon a certain time period whose length is generally indicated in the contract. If no contract is in place to indicate how much time is necessary, then a reasonable amount of time is based on what is generally accepted within the industry.
The Future of Advertising Contracts
As technology continues to play an ever-increasing role in how businesses advertise their products and services, it is also altering the contours of advertising contracts. For instance, advertising contracts are now far more likely to focus on online display of advertisements and on digital analytics that can assess the effectiveness of the message. Hard and fast agreements over a set period of time are becoming less common, as companies look for increased flexibility . Moreover, privacy and data security issues related to the use of technology are also becoming an increasing concern in advertising contracts. Social media has also exploded as an important means for advertising, and a number of advertising contracts reflect this. Advertisers can choose to engage social media influencers, and companies are increasingly requiring such influencers to be part of the contract negotiation process. These and other developments make advertising contracts a dynamic process that will continue to evolve to meet the needs of the latest and greatest technological advances.