This is my second column touching on credit and collections issues that were covered in the March-April issues of BCFM’s bi-monthly magazine for our members, The Financial Manager.

In the first column, we covered ways to improve client relationships and collections success. This week’s column will talk about the importance of addressing liability issues, a topic that is getting more attention as the country’s credit crisis stretches into its ninth month and has some saying we’re in the biggest financial crisis since the Great Depression.

There are more than 18,000 public companies in North America with total annual revenue of $12 trillion and on average owing trade creditors $2 trillion. In fact, Standard & Poor’s latest ‘‘weakest links’’ report is forecasting that 75 of the 93 U.S. companies that it has categorized at risk will default on their debts in the next 12 months. According to the report, the sectors worst hit are media and entertainment along with consumer and retail. While the report focuses on the link between M&A activity and credit risks for some media companies, ad supported media businesses also know that the strength of their credit depends upon healthy consumer and retail markets.

Liability and Collections

Last time I talked mostly about how to handle past due accounts that could be paid by the advertiser. This column will delve into the situations that arise when companies that purchased advertising, cleared the credit approval process and ran their ads but now say they can’t or won’t pay. We fulfilled our end of the bargain and now we expect the advertiser to uphold his (or hers). However, success in collecting that debt can depend upon how well we addressed liability for payment back when we took the order. This is a big issue for our members. BCFM periodically issues advisories to them when the industry’s liability positions are being challenged.

Wanda Borges, the principal member of Borges & Associates LLC, outlined steps to protect against liability confusion in an article entitled “Avoiding Liability Battles,” that appears in the current issue of TFM. Borges, who currently serves as president of the Commercial Law League of America and is a past-chair of the BCFM board of directors, addresses the importance of establishing the right liability position as part of the advertising agreement and provides additional steps toward preserving the legitimacy of a liability claim.

According to Borges, there are currently four media liability positions: sole advertiser liability, sole agency liability, joint and several liability and sequential liability. She finds that the legal battles taking place in most courts today involve two of these positions, joint and several liability and sequential liability.

BCFM recommends that members adopt a joint and several liability position because it recognizes the peculiar nature of media advertising and provides the most protection. While originally drafted to fit the needs of the broadcasting media industry, joint and several liability language is used today by all phases of media, including, broadcast, cable, print and internet advertisement providers. As Borges notes: 

 Except for the media industry, the rule of thumb is that an agent is not responsible for the debts of a disclosed principal. Following that logic, advertising agencies would not be liable for the debts of disclosed advertisers under normal circumstances. Joint and Several Liability clauses create a different scenario by which the principal and the agent become liable for the same debt. However, courts have consistently held that such an eventuality is not possible unless a contract to that effect is created.

 

Sequential Liability clauses create a different scenario by which the principal and the agent become liable for the same debt under specific circumstances. It is important to review the manners by which media contracts are created and the components that comprise those contracts in order to understand the logic of the courts.

Steps toward Preserving Liability Claims

Given the importance of demonstrating joint and several liability to the court, Borges strongly encourages broadcasters to take the following steps:

• Clearly indicate on the insertion order thatthere is an advertiser distinct and separate from the advertising agency.
  
  
• Make sure your contract/insertion order/rate cardcontains joint and several liabilitylanguage. Have clear language on the contract/insertion order/rate cardthat indicates the agency is acting on behalf of the advertising, isbinding the advertiser to the contract, and is also accepting joint andseveral liability as the agency.
  
  
• Have clear language on the insertion order thatincorporates the rate card by reference and indicate where the rate cardcan be found (i.e., on the Web site or in a media kit).
• Alternatively, have the liability languageinserted on the insertion order itself.
  
  
• Notify the advertiser that it is and remainsliable for the full payment of the advertising services until media companyis paid in full.
  
  
• Alternatively, have the insertion order or othercontract signed by the advertiser acknowledging that it remains liable forthe full payment of the advertising services until media company is paidin full.

• If the case of an existing account, review yourdocumentation to determine what your possibilities are in the event theaccount “goes bad” and you do not get paid. If there is nothing on file,currently, indicating liability by the advertiser, send it a letter nowadvising it that it is responsible for payment to you—the media companyin the event the advertising agency fails to pay you.

Stations also need to carefully review order forms or other documentation supplied by the media buyer. Members of the BCFM’s Broadcast Cable Credit Association (BCCA) subsidiary have experienced situations where the media buyer attempted to circumnavigate the station’s efforts to ensure joint and several liability by including a statement like this in its order form:

Any terms in your invoices, documents or rate cards to the contrary are of no force or effect. Any modifications made to this form by the media company are of no force or effect. 

For this reason, we strongly encourage our members to pay attention to all insertion orders and to ask their legal counsel to review any new sales agreements. In all cases, it’s important to verify that agreements conform to your established liability policy.        

Keeping on Top of Unfolding Risk Scenarios

BCFM and BCCA will build upon these recommendations in a distance learning seminar scheduled for April 15. Moderated by Al Carmenini, senior vice president, product development at CreditRiskMonitor, the teleconference will provide examples of companies and industries that are currently at risk as well as negative economic trends that need to be monitored. Carmenini will also offer tips for quickly keeping on top of the unfolding risk scenarios and overall portfolio risk will be explored to better equip credit professionals to meet today’s demands.

We will also have a number of panels aimed at improving the effectiveness of the industry’s credit and collections programs at the upcoming annual BCFM/BCCA Conference, Your World. Your Connection. As the saying goes, “an ounce of prevention is worth a pound of cure.”  Spending a little time to ensure credit and collections practices are consistent with your stations’ liability policy will be “time well spent,” to quote both another saying and a network ad campaign.

Mary Collins is the president and CEO of the Broadcast Cable Financial Management Association, a professional society for addressing the diverse needs of financial and business professionals in the broadcast, cable, and electronic media industries. Her column appears here every other Friday.