New law against abusive advertising contracts has implications for competition
After obtaining expedited approval, President LÃ³pez Obrador published the Law for Transparency, Prevention and Combating Inappropriate Practices in Advertising Contracts (the Advertising Contracts Law) in the Official Gazette on June 3, 2021 It will enter into force on September 2, 2021 and will grant new powers to the Federal Commission for Economic Competition (COFECE) but may depart from the constitutional objectives of the competition authority. The application of the new law can be problematic and can ignore the competence of the Federal Institute of Telecommunications (IFT).
The law on advertising contracts, in general, provides that:
- Agencies may only acquire advertising space on behalf of and for an advertiser, and may not acquire them on their own account with a view to subsequent resale.
- Agencies providing services to advertisers cannot simultaneously render services to the media. In this case, companies in the same group can respectively provide services to advertisers and media companies.
- Agencies can only receive remuneration for services provided to advertisers, as defined in the corresponding contract. Neither an agency nor the third parties it employs can receive any remuneration or benefit in any way from a media company.
- Any discount granted by the media company to an agency must be paid in full to the advertiser.
- Advertisers can control the execution of the advertising campaign.
- These provisions are applicable regardless of the location of an agency, provided that the advertiser is a Mexican resident and the advertisement is broadcast in Mexico.
- The envisaged sanctions range from 2% to 4% of a company’s turnover.
COFECE is the entity responsible for enforcing the law on advertising contracts, handling complaints arising in accordance with the procedures provided for by the Federal Law on Economic Competition (FECL).
In November 2020, a proposal was presented to Congress to regulate the advertising market. According to this document, practices such as conflicts of interest arising from the fact that agencies are generally paid by both the advertiser and the media company negatively affected the market. This and similar practices encourage agencies to select the medium that offers them the highest remuneration, even if it is against the best interests of the advertiser. In addition, many agencies acquire advertising space from media companies at special prices only to resell them with mark-ups and therefore increasing prices. In addition, the proposal underlined that there is a considerable lack of transparency in the market.
The proposal concluded that these practices distort the functioning of the advertising market and, ultimately, constitute undue advantages in favor of certain sectors. In particular, corruption regarding government advertising contracts could be instigated.
In this context, the proposal underlined that these practices are already regulated in other jurisdictions. The French Sapin law, for example, provides that agencies acting on behalf of an advertiser cannot receive any remuneration from media companies, but only services rendered to the advertiser, thus eliminating the possibility of double payment. Likewise, agencies cannot buy advertising space on their own account for resale. In other countries, such as the United Kingdom (1) and the United States (2). surveys and studies have shown a lack of transparency in their own advertising markets. And even if the practices analyzed were not considered anti-competitive, such findings favored the adoption of self-regulation.
In the light of such reasoning, the proposal included provisions to regulate these negative practices, which now have the force of law, following the enactment of the Law on Advertising Contracts.
While the prevention of conflicts of interest, the fight against corruption and the promotion of transparency vis-Ã -vis clients are legitimate aims, the new provisions raise several questions. Without a preliminary and in-depth study to assess the dynamics of the advertising market (3) and the possible effects of the adoption of the new law, the effects of its implementation – for example, whether it may distort competition in the advertising market and related markets – are unclear.
Beyond this concern, there is also the question of whether the legislative objective is compatible with the competition objectives envisaged in the Mexican Constitution and the FECL. Paradoxically, one could argue that the restrictions on agencies could constitute obstacles to competition, since they could be regarded as a “legal provision issued by any level of government which unduly hinders or distorts the process of competition and free access to the public sector. market “.
In addition, relying on COFECE for the application of the law on advertising contracts could be incompatible with the provisions of the FECL. At present, the FECL only considers investigations into monopoly practices (abuse of dominant position and cartels), illegal mergers, barriers to competition or essential facilities, and the determination of market conditions. While it also includes procedures such as merger control, leniency programs and the submission of undertakings, summary proceedings, opinions on licenses and permits, formal opinions and general guidelines, it does not is not clear whether the FECL includes an appropriate procedure to review and enforce compliance with advertising contract law.
Notwithstanding the above, COFECE opened an investigation last August on the market for digital advertising and related services (4). This investigation focused on possible relative monopoly practices (abuse of dominant position) consisting of tied selling or increasing costs, hampering production or reducing demand from other economic agents, which is a procedure regulated by the FECL .
Finally, the law on advertising contracts is undoubtedly also inconsistent since it only refers to COFECE to the entity competent for handling complaints, when certain advertisements are broadcast on television and radio, on which the IFT should have jurisdiction.
To contest the application of the new law, economic agents who consider themselves wronged by it can lodge an amparo appeal before the Federal Judicial Power. In addition, COFECE, IFT, or both, are allowed to initiate constitutional proceedings if they believe that the new law on advertising contracts conflicts with Article 28 of the Mexican Constitution. In fact, the IFT recently issued a press release informing that the law on advertising contracts affects its autonomy, and it will therefore submit this type of procedure. (5)
(1) See, for example, the decision of the British regulator Ofcom here and the study of the trade body ISBA here.
(2) See, for example, the study by the US trade organization ANA here.
(3) Article 96 of the Federal Law on Economic Competition envisages a procedure for determining the market conditions which can be initiated at the request of the executive power.
(4) File n Â° IO-003-2020. See COFECE press release available here.
(5) For more details, please see the press release published on June 24, 2021