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Reforms in the area of Advertising Contracting

On April 30, 2021, the Chamber of Deputies approved the opinion of the Law for the Transparency, Prevention and Fight against Undue Practices in Advertising Contracting. Below we detail the current problems, the regulatory proposals and our conclusions in this regard.

I.- Introduction

On April 30, 2021, the Chamber of Deputies approved the opinion of the Law for the Transparency, Prevention and Fight against Unfair Practices in Advertising Contracting (the “Law”), with 339 (three hundred and thirty-nine) votes in favor, 92 (ninety-two) against and 9 (nine) abstentions.1 The purpose of the Law is to regulate the commercial practices in the advertising market, proposing to promote transparency in advertising contracting processes for the benefit of advertisers and end consumers. Its clauses establish, among other things, the form of advertising contracting and the sanctions that may be applicable in case of any non-compliance.The advertising market in Mexico for 2018 represented an investment of 0.92% of the gross domestic product in Mexico; placing the Country as the second most relevant Latin American market in advertising. Likewise, it was reported that each peso invested in advertising within the Country would have a return for the investor of $17.00 pesos, as pointed out by the Mexican Association of Advertising Agencies2.In 2013, the Mexican Association of Advertising Agencies established that 90% of the advertising generated in Mexico is developed by advertising agencies and that this represented about 85% of the investment in the media in the Country3. At present, Mexico lacks a strict regulation in advertising matters; therefore, the Mexican authorities have determined in the Law’s explanatory memorandum that there are abusive conducts by advertising agencies and, to a lesser extent, by the media. In this sense, such authority reports that advertising agencies generate extraordinary and unjustified profits to the detriment of advertisers and advertising media.

II.- Current Issues in the Advertising Market

New digital technologies have incorporated new advertising media in the market (different from traditional media such as newspapers and magazines) with higher degrees of specialization and technical requirements, which has resulted in advertising media (specifically digital media) becoming more complex and sophisticated, which has excluded from the market a large number of advertising companies that, consequently, have the need to hire advertising agencies for their advertising campaigns.Specialized advertising agencies, in recent years, have functioned as intermediaries between advertisers and the media. As a result, in many cases, advertising agencies have become indispensable to the media because the media’s profits depend on being selected for the execution of advertising campaigns, and the media remunerate the agencies so that the latter, in turn, consider them and contact advertisers.

According to the Law, some of the offers and advantages that the media grant to advertising agencies may include: i) sales commissions; ii) indirect remuneration for the sale of advertising space at below-market prices for subsequent sale to advertisers; and iii) the execution of fictitious consulting contracts. As a result, such offers or advantages have affected the advertising market to the direct detriment of advertisers and end consumers.Likewise, advertising agencies frequently enter into agreements with the media and advertisers, obtaining almost total control of advertising spaces by being able to freely dispose of them.

The situations described above demonstrate: i) a considerable lack of transparency in the contracting of advertising; ii) an alteration to market prices (with real estate agencies benefiting); iii) a conflict of interest with respect to the choice of the media; iv) the lack of sanctions for abusive conduct by advertising agencies; and v) the existence of a relative monopoly in the advertising services market, mainly in digital advertising.

III.- Economic Agents in Advertising Matters

To better understand the functioning of the advertising market, it is necessary to explain the participation of three economic agents: i) the advertiser; ii) the advertising agencies; and iii) the media (the “Economic Agents”).The advertiser is the individual or legal entity in whose interest advertising is carried out to make known the characteristics and benefits of its products and/or services.

The media are the individuals or legal entities that by means of printed copies, telecommunications, broadcasting, satellite signals, internet, fiber optics, cable or any other means of transmission disseminate traditional or digital advertising material in advertising spaces.Finally, the advertising agencies are the individuals or legal entities whose main activity is the creation, design, planning and execution of advertising campaigns, as well as the contracting of advertising spaces for the account and order of the advertisers

IV.- Proposed Advertising Contracting Regulation

The purpose of the Law is to regulate advertising contracting by establishing mechanisms and prohibitions that prevent the celebration of abusive practices by any Economic Agent, focusing especially on the acts that advertising agencies may perform.

Based on the foregoing, the purpose of the Law is to regulate the commercial practices carried out in the advertising market, encouraging transparency in the advertising contracting processes for the benefit of advertisers and end consumers.

In this way, such law regulates three situations that are fundamental for the future of the advertising market in Mexico: i) contracting of advertising agencies; ii) limitation of actions by the advertising agency; and iii) sanctions.

IV.1.- Contracting of Advertising Agencies

It is established that the hiring of the advertising agency by the advertiser will be documented through a mandate contract, which will contain the terms and conditions of the agency’s remuneration. Likewise, the advertising agency, for the services rendered to the advertiser, may only receive as remuneration the consideration established in the mandate contract. The foregoing is relevant because, in accordance with the Law, advertising agencies or third parties used by them may not receive remuneration, commission and/or benefit in kind from a media outlet.

Additionally, any discount that may be granted by the media to the advertising agency must, at all times, be transferred in full to the advertiser, since it is the advertiser that has effectively contracted with the media.

In addition to the penalties established by the Law (see point IV.3. below), the advertising agency shall be liable for the payment of damages in respect of any breach of the mandate granted to it, since it shall act as agreed in the contract in the name and on behalf of the advertiser.

IV.2.- Limitation of Actions by the Advertising Agency

Pursuant to the Law, advertising agencies may only acquire advertising space for the account and order of an advertiser through the execution of a mandate contract, thus preventing any agency from acquiring advertising space for its own account for subsequent resale to an advertiser.

Likewise, it is established that any advertising agency rendering services to advertisers may not simultaneously render services to the media. However, such services may be provided to the media by any affiliate, subsidiary and/or any company belonging to the corporate group of the advertising agency.

Finally, it is provided that any advertising agency that acquires programmatic digital advertising on behalf and order of the advertiser, must inform the media that has sold the advertising spaces about the following: i) identity of the advertiser (immediately); ii) the results of the services rendered to the advertiser; iii) its own technological tools and the services it has required from third parties establishing their identity; and iv) the means used to avoid broadcasting in advertising spaces that could be detrimental to the advertiser. The information set forth in points “ii” to “iv” above must be provided during the month following the broadcasting of the advertising spaces.

IV.3.- Penalties

Fines for non-compliance with the provisions of the Law may be up to 4% of the revenues of the Economic Agent who has committed the infraction and, in case of recidivism, up to double the aforementioned amount.

V.- Conclusions

The advertising media have a high impact on the Mexican economy; currently, they lack a specific regulation, which has generated certain legal uncertainty among the Economic Agents that participate in the industry, mainly affecting advertisers who have a perception of abuses by advertising agents and the media.

Therefore, the Mexican government, through the Law, has established the bases and guidelines for the contracting of advertising in order to avoid abusive conduct and provide legal certainty and transparency in the contracting process in advertising matters, establishing control measures and fines for violators.Finally, with the entry into force of the Law, it is expected that the advertising market in Mexico will be more competitive and will have a higher quality in the advertising services that the media and advertising agencies can offer to the consumer.

As a result, it is expected that the costs incurred by advertisers to carry out an advertising campaign will be considerably reduced, to the benefit of the users of this type of services in Mexico.


1 Camara de Diputados, Bulletin of April 2021. Plenary of the Chamber of Deputies approved reforms on advertising contracting. Available at: https://comunicacionnoticias.diputados.gob.mx/comunicacion/index.php/boletines/el-pleno-de-la-camara-de-diputados-aprobo-reformas-en-materia-de-contratacion-de-publicidad#gsc.tab=0b Date of consultation May 3, 2021.

2 Mexican Association of Advertising Agencies. Advertising investment reaches nearly 1% of GDP in the last four years. Available at: https://bit.ly/3axqlk9. Accessed on April 22, 2021.


3 Mexican Association of Advertising Agencies. Conexión 360 Magazine. Available at: https://bit.ly/3erR0jy. Accessed on: April 23, 2021.

CONTACT

Gerardo Gallego Díaz de León | Partner| [email protected]

Jorge Cobos Franco | Senio Associate | [email protected]

José Mayagoitia y de Rosenzweig | Senior Associate | [email protected]

T. 52+(55) 5202-0717

This article does not constitute legal advice and is protected by copyright law.

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