Brief Comments on the New Advertising Contracting Law

According to the statement of purpose of the new Law, its enactment responds to a need to prevent “improper practices” present in the advertising industry, such as: (i) double charging by media agencies, since they receive compensation both from the advertisers they represent and from the media outlets where the advertising is placed; (ii) the conflicts of interest that exist when an agency represents an advertiser and, in turn, has commercial relationships with the media outlet where such advertiser’s advertising is displayed; (iii) the purchase of advertising space by agencies for subsequent resale at a markup to advertisers; and (iv) the execution of simulated contracts or contracts at above-market prices between media outlets and media agencies. Accordingly, the Law’s purpose, in general terms, is to: (a) promote transparency in the advertising market, specifically in the processes for contracting advertising space; and (b) prevent and combat commercial practices that constitute an undue advantage to the detriment of advertisers and, ultimately, of consumers, principally by avoiding conflicts of interest on the part of agencies, since one of their main roles in the advertising market is intermediation between advertisers and media outlets. Additionally, although the Law does not expressly state so, it would appear to seek to establish mechanisms to prevent anticompetitive practices in the advertising market by such intermediaries, whose lack of supervision had led them, in the legislator’s opinion, to inflate the prices of their services or obtain “undue gains” by reselling advertising space acquired from the media on a mass basis. The new regulation incorporates certain significant restrictions and obligations for Agencies and Media, in favor of Advertisers that enter into Advertising Contracts (as such terms are defined in the Law itself). Thus, it prohibits Agencies from: (i) acquiring advertising space on their own account for subsequent resale to an Advertiser, since they may only acquire it on behalf and by order of an Advertiser and “within the framework of a mandate agreement”; (ii) providing services simultaneously to Advertisers and to Media; and (iii) receiving remuneration, commission or benefits in kind from a Medium, in excess of the consideration received by the Advertiser. As regards the new obligations, the Law incorporates a series of burdens and measures that, in most unregulated industries, would be subject to the will of the contracting parties. For example: (i) the mandate agreement entered into between Agency and Advertiser must set forth the remuneration conditions, and the Agency may only receive, as remuneration for the services rendered to the Advertiser, the consideration established in such agreement; (ii) every Agency must fully transfer to the Advertiser any discount granted by the Medium (a scheme known as pass-through); and (iii) every Agency is obligated to provide periodic information to the Advertiser regarding the results of the services rendered, in accordance with the indicators and criteria agreed upon (e.g., impressions, visibility, interactions, clicks and engagement, audience segmentation, optimization methods, technological instruments used for the provision of the services, among others). Additionally, the Law imposes certain obligations on the Media that they must fulfill vis-à-vis Advertisers, principally related to invoicing and the delivery of information regarding the dissemination of the Advertising Spaces. As can be seen, the new Law seeks to achieve its objectives by incorporating into the Mexican legal order certain complementary provisions on commercial contracting (specifically as regards advertising contracting), transparency, consumer protection and economic competition. In a certain way, the Law turns the advertising industry and advertising contracting into regulated activities. Based on a preliminary analysis of such provisions, we share the following comments: a) Some of the information-delivery obligations will help increase transparency through the delivery of information by Agencies in favor of Advertisers, reducing the transaction costs incurred by the parties in negotiating advertising contracts. It is reasonable to anticipate that this measure will benefit smaller Advertisers or those with a smaller advertising budget to a greater extent, since they are usually the ones in a weaker position to negotiate the terms and conditions of advertising contracts with Agencies. b) Certain restrictions imposed on Agencies could contribute to the prevention of conflicts of interest, which would result in a more adequate and effective representation of Advertisers’ interests. Where this is the case, such measures could have an impact on reducing the cost of Advertising Spaces for the benefit of Advertisers. c) On the other hand, the measures designed to prevent concentration in the operations for the purchase and sale of advertising space (by requiring Agencies to purchase it in the name and on behalf of Advertisers, in their capacity as principals) appear to be poorly suited and could have harmful effects on the advertising market and on related markets. In certain cases, the purchase of Advertising Spaces by Agencies allows Advertisers to gain access to prices and conditions to which they otherwise (that is, acting individually) would not have access. Thus, by prohibiting intermediation, smaller Advertisers or those with a smaller advertising budget are prevented from accessing, at least partially, the volume discounts obtained by Agencies that negotiate advertising-space prices “wholesale.” In other words, this type of “wholesale” purchase of Advertising Spaces may well result in efficiencies (through cost reductions) for Advertisers. d) Likewise, it is not clear that restricting the purchase of Advertising Spaces by Agencies “on their own account for subsequent resale to an Advertiser” is consistent with freedom of commerce when it involves a lawful intermediation service that entails a certain degree of commercial speculation. Thus, it is reasonable to anticipate that this measure, together with other provisions of this new Law, will be challenged before the competent courts by the economic agents that consider themselves affected. e) In addition, the Law’s own statement of purpose notes that conduct similar to that supposedly identified in the advertising industry in Mexico has been identified and investigated in several countries (France, the United Kingdom, the United States), namely: lack of transparency, double-charging practices and breach of the fiduciary duty owed to Advertisers by Agencies. Likewise, the initiative itself states that “such practices were not characterized (sic) as violations of competition laws, but rather as the subject of criminal complaints for fraud and extortion.” Thus, it is questionable that the Law empowers the Federal Economic Competition Commission to hear and process the complaints arising from the provisions of the Law, “in accordance with the procedures set forth in the Federal Economic Competition Law,” especially when it comes to the conduct described in this paragraph. f) On the other hand, if there were conduct in the advertising industry in Mexico deemed to violate free market participation and competition, it is important to bear in mind that our legal order already contains substantive rules, procedures and competent authorities to hear such complaints, namely: the Federal Economic Competition Law and the Federal Economic Competition Commission (“COFECE”). In this regard, the Law is not clear and is silent as to (i) which parties will have standing to file a complaint related to the Law; (ii) the requirements that such complaint must contain and, more importantly, how such matters or conduct relate to the field of economic competition; and (iii) which of the procedures established in the Federal Economic Competition Law COFECE must follow to determine whether or not to impose a sanction. It is difficult to assert that COFECE would use the investigation procedure for monopolistic practices to investigate the referenced complaints, since the mere failure to comply with the precepts established in the Law does not entail the existence of a practice provided for as unlawful in the Federal Economic Competition Law itself. In any event, some of the noncompliance scenarios perhaps fit with formal tax or administrative obligations, which could hardly be sanctioned by COFECE in an administrative proceeding conducted in the form of a trial. In light of all the foregoing, we consider it important that the economic agents participating in the advertising industry in Mexico assess: (i) the measures they may or must take to comply with the provisions introduced by the new Law, in order to avoid or mitigate impacts on their operations and/or business model, as well as (ii) the alternatives and opportunities to challenge those provisions they consider to violate their rights. We place at your disposal the knowledge and experience of our team to advise you in such analysis and, where applicable, in the implementation of the corresponding corporate and contractual measures, as well as in the filing of the corresponding remedies. For additional information, please contact our experts: Luis Burgueño, Partner: +52 (55) 5258-1003 | lburgueno@vwys.com.mx Fernando Carreño, Partner: +52 (55) 5258-1042 | fcarreno@vwys.com.mx Pablo Jiménez, Partner: +52 (55) 5258-1016 | pjimenez@vwys.com.mx Diego Sierra, Partner: +52 (55) 5258-1039 | dsierra@vwys.com.mx