Fed scrutiny on big agency in-house contract rigging

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The U.S. Justice Department is investigating allegations that giant advertising agencies, with in-house production / post facilities, are inappropriately steering business to their studios by rigging the bidding process for those contracts.

Over the past few months, New York-based Rebecca Meiklejohn, a government antitrust attorney, has been interviewing big agency executives about these allegations, the Wall Street Journal reported.

Big agencies allegedly have been manipulating the bidding process, urging independent companies to inflate their prices so that contracts could be awarded to the agencies’ in-house facilities.

Federal antitrust law prohibits price-fixing and bid-rigging.

The Association of National Advertisers (ANA) last June released the results of a seven-month probe that found agencies are shortchanging clients through non-transparent business practices.

The ANA report, which didn’t point to specific ad agencies, detailed a range of suspect practices, such as agencies getting rebates from media sellers for reaching spending thresholds on behalf of their clients. Big agencies have denied wrongdoing.

The report has caused marketers to launch audits of their media-buying contracts with agencies.

Meiklejohn’s inquiry has some ties to the ANA transparency probe. Shortly after the ANA report was released, she contacted people close to the inquiry to see if they uncovered anything related to the bid-rigging allegations she was already investigating.

K2 Intelligence, the firm that conducted the ANA investigation, uncovered allegations of postproduction bid-rigging that was included in the report’s early draft but didn’t appear in the final version, which focused on the media-buying business.

An ANA task force is currently looking into the issues it discovered in the post sector. The language in the early ANA draft claimed that “some creative agencies” are increasingly directing “postproduction projects to affiliated companies within the same Agency Holding Companies,” according to documents the WSJ reviewed.

The relevant passage said six independent-firm producers and editors reported being asked to submit so-called “check bids,” a process in which agencies ask post houses for ostensibly competitive bids on projects they had already determined were going to their in-house companies.

The post companies were urged to inflate their bids “to create a paper trail that justified the advertiser’s decision to award the job to an in-house facility, which provided a rival bid at a lower price,” the ANA draft stated.

While agencies have been offering production/post services to some extent for decades, in recent years they have increased this area of the business to find new revenue streams and to help address advertisers’ growing need for more ad content due to the rise of social media.

The AICE first raised the issue publicly in October, 2014 when it sent a policy statement to its members and posted it on the AICE website, mainly taking issue with “check bids.”

The statement’s purpose was an effort “to raise awareness on the part of the advertising community to get agencies to play fair and be transparent and ethical in the way they handle their post bids,” said Rachelle Madden, AICE executive director in New York.

The Wall Street Journal article was written by Suzanne Vranica at suzanne.vranica@wsj.com and Brent Kendall at brent.kendall@wsj.com.

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