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Advertising agencies and the law: Liability for the content of advertisements (part 4)

16 June 2020

#Technology, Media & Telecommunications

Advertising agencies and the law: Liability for the content of advertisements (part 4)

There was a period in the early 2000’s when the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) brought a number of cases, which we will discuss below, aimed at targeting advertising agencies as being responsible for misleading or deceptive advertisements created for their clients. The ACCC’s rationale for this was that the agencies were the ‘gatekeeper’ and should also be liable to the extent these materials were in breach of the law. On these facts, this position was ultimately rejected by the courts, and from our understanding, the regulators have not attempted to bring any similar cases to court since that time.

In the last of our four-part series, we examine the liability for the content created by advertising agencies and why prudent advertisers should ensure they ultimately vet the content created for them by others prior to it being published.

Exposure to liability for breach of consumer laws

The production of an advertisement will involve a potential exposure to liability under the Competition and Consumer Act 2010 (Cth), in particular Schedule 2 of that Act, which sets out the Australian Consumer Law (ACL).

The ACCC responds to complaints in relation to advertisements and promotions, and actively monitors advertising campaigns to ensure that its role in protecting consumers is fulfilled. Section 18 of the ACL is the most litigated section and provides: "A corporation must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive".

Section 29 of the ACL also prohibits a range of activities in relation to the supply or promotion of goods or services including, in particular, false representations about quality, sponsorship or approval, performance characteristics, price or country of origin.

There are a number of other unfair practices prohibited by the ACL, including:

  • false offers of prizes and gifts
  • bait advertising
  • referral selling
  • harassment or coercion
  • pyramid selling.

The ACL sets out various consequences of contravention of its provisions. These can be quite onerous and include the ability of the court to impose financial penalties, which for corporations can be the greater of:

  • $10,000,000
  • three times the value of the benefit received
  • 10 per cent of annual turnover in the preceding 12 months, if a court cannot determine the benefit obtained from the offence.

The ACL and the client or agency relationship

The ACL, as it applies in regulating misleading and deceptive conduct and false representations in respect of advertising, contains a scheme which distinguishes between principal liability and accessorial liability. However, when considering penalties under the ACL, being found liable as an accessory rather than a principal usually does not make any significant difference, as an accessory will most likely be treated in the same way as a principal.

Two appeal cases, Medical Benefits Fund of Australia Limited v Cassidy [2003] FCAFC 289 (MBF Case) and Cassidy v Saatchi & Saatchi Australia Pty Ltd [2004] FCAFC 34 (NRMA Case) are worthy of consideration. It should be noted that each case concerns breaches of section 12DA of the Australian Securities and Investments Commission Act 1989 (now the Australian Securities and Investments Commission Act 2001) which at the time replicated (in respect of financial services) the then equivalent of section 18 of the ACL.

The MBF Case

The MBF Case concerned an advertising campaign featuring television commercials and billboards that was disseminated to the public in early 2001 and suggested that there were no waiting periods for people joining MBF. However, the advertisements also featured fine print disclaimers stating that there were in fact a 12-month waiting period for pregnancy-related services.

Original decision

In the original decision, Justice Hill found the campaign to be misleading and deceptive and that the advertising agency, John Bevins, was liable. This is despite the fact that the employees of John Bevins did not believe the advertisements to be misleading or deceptive, did not intend to mislead the public, and had been informed by MBF that MBF's lawyers had approved the campaign.

Justice Hill referred to advertising agents as 'gatekeepers' with a responsibility to ensure that advertisements are not misleading or deceptive, stating:

"They had created the advertisements, they were aware that the advertisements were to be published and in fact placed these advertisements with the media. The fact that they made a mistake in assuming that the advertisements did not contravene the law is no defence..."

This decision broadened the liability of advertising agencies significantly.

Decision on appeal

On 16 December 2003, the Federal Court partially overturned the decision of Justice Hill finding that John Bevins should not be held liable for misleading and deceptive conduct.

Even though the advertising campaign was upheld as being in breach of the Act, John Bevins was found to have not knowingly been involved in creating the misleading or deceptive impression. The decision of the appeal court has clarified the courts' view of agency liability. Justice Stone stated that the apparent lack of intent on the behalf of the agency was a crucial factor in the decision of the appeal court, and should have led to an opposite conclusion of agency liability at the original hearing. Stone J stated:

"Imposing the role of 'gatekeeper' on an advertising agent who knows that an advertisement is misleading and is careless or reckless in ensuring that the problem is corrected before publication is quite different from imposing on advertising agents an obligation to act as gatekeeper in respect of advertisements that they do not believe are misleading or deceptive ..."

As a result of the decision of the appeal court, it is likely that, in future cases, an advertising agency will only be liable for misleading or deceptive conduct if they are reckless, negligent or specifically appreciate that misleading representations may be conveyed in advertisements. The agency must have knowledge of the essential facts making out the misleading or deceptive advertising. The ACCC was refused special leave to appeal the decision of the Full Federal Court to the High Court.

The NRMA Case

On 6 November 2001, the ACCC instituted proceedings against NRMA and Saatchi & Saatchi Australia Pty Ltd (Saatchi) based on allegations of misleading and deceptive advertisements of health insurance products.

Similar to the MBF advertisements, it was alleged that the advertisements attempted to persuade consumers to join or switch health funds by promising free obstetric services. The advertisements were accompanied by fine print disclaimers which stated that full insurance coverage would only be obtained following certain payments and after the 12-month waiting period for obstetric-related benefits had been served.

Saatchi was the advertising agency that created and prepared the advertisements for the NRMA companies. ASIC and the ACCC pursued Saatchi as a principal, which is different from the approach taken in the John Bevins case. The issue was whether Saatchi was liable as a principal for publishing misleading representations in the advertisements.

At first instance, the applicants argued that Saatchi had engaged in misleading and deceptive conduct as it had used its creative skills to prepare the advertisements for NRMA knowing and intending that the advertisements would be published in certain newspapers. It was contended that Saatchi had created the vehicle that contained the misleading representations.

Jacobson J found that a practice was followed between the parties in the development of advertising campaigns for the NRMA that was followed in the present case. This practice involved NRMA briefing Saatchi on the campaign, Saatchi preparing a creative ideas brief and once the creative ideas brief was approved by NRMA, Saatchi would propose draft advertisements. NRMA then approved these advertisements along with its in-house lawyers.

Jacobson J rejected the applicant's arguments that Saatchi made misleading representations. He considered the following as vital to assessing the relationship between an advertising agency and a client:

  • whether on an objective reading of the advertisement, there was anything in the advertisement which could convey to the relevant section of the public that the representation was by Saatchi
  • whether Saatchi made the representations by reason of the fact that it had prepared the advertisements and provided them to the NRMA companies, expecting or knowing that they would be published. Jacobson J considered that this could only occur if the advertising agent actually disseminated the advertisement and if the advertisement referred to the advertisement agency. Saatchi did not disseminate any aspect of this campaign to the public.

The NRMA case went on appeal, where the decision of Jacobson J was upheld.

Meaning of these cases for advertising agencies

Following the decision in the MBF Case, an agency may find itself liable as an accessory if it is shown to have known the essential facts or matters which could allow the advertisements to be characterised as misleading or deceptive.

Following the decision in the NRMA Case, an advertising agency is unlikely to be found liable as a principal for misleading or deceptive conduct under the ACL if it does no more than prepare advertisements for its clients. If the agency disseminates the advertisement, this case seems to suggest that it could be liable.

Practical steps for advertising agencies

Advertising agencies should take the following cautionary measures:

  • ensure their terms and conditions of trading with their clients contain an appropriate indemnity against liability of the agency as a result of factual material supplied by their client being inaccurate (see our previous discussion here)
  • ensure appropriate internal procedures are in place within the agency so that a suitably experienced executive and/or qualified legal adviser checks every advertisement prior to its publication or broadcast
  • ensure the agency has in place a compliance program in which all of its personnel engaged in the preparation of advertisements are updated regularly on current legal developments and requirements
  • ensure the agency itself (and at the expense of its client) obtains legal advice from suitably qualified lawyers in respect of all advertisements which may potentially be misleading or deceptive (or involve other legal issues such as copyright or defamation).

The best approach to take when drafting or advising on any advertising agency and client contract is to ensure that the relationship between the parties and all rights and obligations between the parties are clearly defined.

This concludes our four-part series on examining the relationship between advertising agencies and their clients. Throughout the series, we defined and discussed ways to determine the agency-client relationship (part 1), looked at the essential contract terms that should be included to govern the relationship (part 2), touched on issues that can arise when developing creative materials and explored ways to identify who owns the intellectual property in these materials (part 3), and finally, why prudent advertisers should vet any content created for them by others prior to publishing to protect themselves from liability for breach of consumer laws.

Authors: Ian Robertson AO & Emily Booth

The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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