news analysis: Case Pending

Whoever wins the Sears vs. Focus court battle, the jury is still out on liability
LOS ANGELES–In 1972, Lennen & Newell, one of the 15 largest agencies in America, died. It was not, as the samurai say, a good death, but it sparked a transformation in the industry that echoes in the current legal dispute between Santa Monica, Calif.-based Focus Media and its erstwhile client, Sears, Roebuck & Co.
Like L&N, the Focus flap may be the flash point to an even wider dispute. Sears fired Focus last month and sued the agency for breach of contract, claiming that Focus had not paid at least $3.5 million in media bills for which the retailer was responsible. Focus countersued for $100 million in damages, claiming Sears was trying to run it out of business.
At the heart of both stories is a deceptively simple question: When the media isn’t paid, who is liable?
In the 30 years since L&N, the issue has festered; agencies, advertisers and sellers each hold a different opinion. In 1991, the American Association of Advertising Agencies changed its position that the agency bears sole liability for unpaid media bills with a policy called “sequential liability.”
The 4As policy states, “The agency shall be solely liable for payment of all media invoices if the agency has been paid for those invoices by the advertiser. Prior to payment to the agency, the advertiser shall be solely liable.”
This decision did not sit well with the sellers; they write a dual liability clause into most contracts. The Association of Independent Television Stations, the Television Bureau of Advertising and other media arms all oppose selective liability, preferring either dual or sole (agency) responsibility for bills due.
Clients often feel that if they pay promptly and fully to their buying agent that absolves them of responsibility. But ultimately, the client is responsible. Technically, the Association of National Advertisers takes no stand, but the entire issue is a swamp no one can wade through.
To do business, each side has agreed to disagree. Because no standard has been reached, however, every disagreement over liability–especially such a high profile one as a major retailer suing its own media agency–has the potential to ignite a much wider conflict that can imperil credibility, trust and survival.
Not surprisingly, agencies, clients and sellers uniformly request anonymity when talking about liability. But they all acknowledge that the Sears/Focus fight may be as significant as the L&N story.
“Most definitely, the case is a litmus test for sequential liability,” says one media agency executive. “You’re talking about $100 billion placed in media [without a problem]. One situation and all advertisers will say, ‘Let me now investigate how I’m paying my buying service.’ “
“Everybody’s been fooling each other,” says one consultant. “The moral is, shame on you, the client. For the love of God, invest in a relatively inexpensive media person on staff whose job it is to watch the funds. Pay a little less attention to the lighting in your commercial and a little more attention to where the money is.”
The survival of Focus Media is on the line. If Sears wins, the agency will almost surely die. But even if Focus wins, the damage to its credibility has been done.
For Sears, a victory may also be Pyrrhic. The spectacle of one of the country’s largest advertisers fighting a comparably tiny vendor over a relatively small sum of money can’t be considered good PR.
Nevertheless, the issue goes beyond the reputations or the survival of an agency or its advertiser. As one top media executive notes, “How a dispute like this is played out is very significant for our industry.” This courtroom brawl may seem to be about money. But it’s really about trust. And that is priceless.