Running an agency: Six legal questions to answer

Running an agency is exciting but it is easy to forget to make provisions for when things go wrong. Follow this guide to avoid a legal minefield.

Your business: avoid wandering into a legal minefield when setting up an agency
Your business: avoid wandering into a legal minefield when setting up an agency

It always starts so well, doesn’t it? Bright with energy, enthusiasm and purpose, you pour your heart and soul into your new agency. You know for certain that you will do great things with your new clients. Your brilliant new appointments will take the business to another level. That fantastic new campaign is going to make your name and transform your fortunes.

Who would sully the optimism of those new relationships and projects with the negative thinking involved in trying to work out all the different ways that they could possibly go wrong? Not enough of us, it would seem.

"It’s human nature to look on the bright side and it is awkward to discuss the demise of a relationship at the outset," says Robert Lands, head of intellectual property at solicitors HowardKennedy. "But my experience is that things go wrong in the most unexpected of ways," he adds. "That’s why you need proper legal protection."

It is not so much that legal contracts are invincible or offer guaranteed protection; it is more that a contract forces both sides to properly think through the nature of their agreement in advance, he says.

"I don’t know what proportion of PR activity is or isn’t protected by binding contracts. But I do know that in the majority of disputes we act in, there are no contracts."

Even the most basic questions involved in running a PR agency are often left unaddressed. Are you a partnership, a sole trader or a limited liability company? Who owns the ideas you generate? What do you do if an employee has a grievance? Who picks up the tab if a campaign goes wrong in some way? Is there even a signed agreement with the client or are you conducting business on a handshake and a prayer?

There is an extra benefit in being legally buttoned down when it comes to selling your business. Obviously it is worth more if all its relationships are signed and sealed than if they exist only in the ether.

Mind you, err too far on the side of safety and you could end up spending great swathes of your hard-won income on prophylactic lawyers’ fees. So what are the legal questions you really need to address without acquiring a VIP membership in your solicitor’s frequent buyer programme?

1 What are you exactly?

This is a recurring question for smaller agencies. Are you a partnership, a limited company or what? It may seem like a technical detail, but it determines exactly what happens in the distinctly possible event that you fall out with your business partners. "PR agents are especially bad at knowing what sort of entity they are," says Lands. "How it unravels depends largely on what is in the shareholders’ agreement, particularly who buys who out, for what amount, how you value shares etc."

He recalls one partnership he represented where one of the two principals retired and the remaining partner was signing letters as ‘director’. "You can’t be a director of a partnership. And you can’t be a partnership of one. You are probably a sole trader. If you have set yourself up as a partnership without an agreement and one partner leaves, you could have to dissolve the whole thing," he warns.

So you need a founding agreement that addresses questions such as who owns what proportion of the business? How was it established? How do you value the shares? Who owns the client relationships?

And do not forget, adds Lands, that the nature of your constitution determines your legal responsibilities: "If you are a company it is an offence not to disclose on all your materials your full registered name, your company number and registered address."

2 What happens to your IP when people move on?

Every agency starts when the principals take the decision to leave their previous employer. That is how you started up and that is how eventually some of your best people may in turn start up on their own.

A major problem for all creative businesses is that their most valuable property – ideas, data and relationships – can exist only in employees’ heads. So how do you ensure that when they walk away, they do not take your business with them?

"The main thing is to have very clear employment contracts and service agreements to define what should remain confidential," says Jane Amphlett, employment partner at HowardKennedy. You are quite within your rights to place restrictions on what employees can and cannot do after leaving. You can put them on gardening leave to ensure their knowledge is dated by the time they return to work; you can require them not to solicit your clients and staff or deal with them for a reasonable period. You can even require that they do not go and work for a competing business.

But you can also help yourself by ensuring that your people do not hog client relationships. And have policies (that you share with employees) governing who can download what and when. Do staff need approval from line managers to send work to home computers, for instance? If they do, require them to delete information such as client lists at the end of their employment. And ask them to sign a warranty that they have done so.

 3 Whose IP is it anyway?

Agencies often use other people’s intellectual property, such as the client’s brand or a third party’s music or artwork. Clients often assume that because they are paying for it all, they own everything. On the other hand, suppliers usually assume you are just ‘renting’ their property. This can lead to all sorts of conflict, with the agency caught in the middle of other people’s expectations. 

"You have to ensure that you have any consents you need when you are using other people’s work, in whatever capacity," says Lands. "To avoid disputes it is particularly important that you specify all the uses you need: which geographical areas, how long can it be used, how often can it be used, how it will be used and whether it can be altered and so on."

And avoid falling into the trap of false endorsement when you are using other people’s images and words, especially if they are celebrities: "You can say somebody used your product but you can’t imply without agreement that they are endorsing it."

One especially contentious question is who owns the rights to work you have produced – especially in a pitch. Land recommends having a ‘pre-nup’ non-disclosure agreement with prospective clients. The trouble is that it can slow you down and sour the fledgling relationship if you introduce lawyers before you have even met properly.

There are simple, inexpensive measures you can take that fall short of a full legal agreement, says Lands: "You might set it up with a short email that makes clear that you own the ideas presented. Even the simple act of stamping all charts and documents ‘confidential’ can offer you some protection. It certainly leaves no doubt in the client’s mind that these materials are not to be used publicly."

Then there is the treacherous question of who owns work produced by freelancers? Most agencies use them at some time or other, often to help with pitches. You automatically own the rights to all work produced by employees, but not to the work produced by freelancers unless it is agreed specifically. "It is generally best to get a warranty from freelancers that allows you to do what you need to with their work, " says Lands.

4 Agent or principal?

PR companies are known as ‘agencies’, although sometimes they aren’t. The term has a specific legal meaning, says Lands. He says: "The main distinction in law is that an agency acts for somebody else – the principal. The principal is bound by law but the agent isn’t."

This matters because the PR agent may find themselves signing contracts with third parties, say for venue hire or creative services, thinking it is for their clients when in fact it is on their own behalf.

There are disadvantages to being an agent. For instance any money that comes through your company cannot be counted as turnover that boosts you in industry league tables. "But there is no doubt that you are better legally protected by being an agent," says Lands. "So just specify in your contract, ‘we will enter into contracts, in the client’s name’."

Another set of contractual problems arises because agencies are often not instructed by the end client but by another agency, say an ad agency, that has created a new campaign for the client. This can mean that responsibilities become blurred. Who is responsible for approval? Who is responsible for final sign-off? The end client or intermediate client? How do you keep control of the budget and ensure you don’t end up out of pocket?

"It’s all about establishing the nature of your relationship at the beginning. If you can, it is enormously beneficial because you are less likely to end up with egg on your face when it goes wrong," says Lands.

A related issue is how to protect your relationship with the third party. It is very easy for a client to ‘disintermediate’ you – to cut you out of the deal. It is always a good idea to include a non-solicitation clause that says: "You cannot contract with anyone we have introduced you to for… a fixed period." It is usually the project’s duration plus six months.

5 Who is liable if it goes wrong?

Most PR firms are relatively small, but that does not prevent them from working for huge brands, perhaps in sensitive or dangerous areas, sometimes on a global scale. Your ears should be pricking now at the horrendous thought of what happens if something awful goes wrong. Maybe a stand you have erected for the launch collapses? Or the product poisons people? Or a promotion gets out of control and people are hurt in the ensuing riot? You could find yourself liable for ruinous amounts of compensation.

It is wise to make sure if you are doing big public stuff that the risk is commensurate with the reward, advises Lands. "That means inserting a clause in your contract that limits your liability and specifies the most you will be liable for – usually the value of the job." You can also exclude certain types of claim such as indirect losses and reduced future earnings caused by damage to the brand.

You can peg it to an insurance cap or a multiple of the fee, he advises, although the law says there are some things you cannot limit, such as death. If the lions you hire for the launch eat a child in the crowd because of your negligence, prepare for financial ruin.

You may wonder why the client would agree to that, but the protection works both ways. "If you infringed someone else’s trademark while carrying out a promotion, the client could be responsible. So such an agreement is in their interest," says Lands.

6 Did you treat your employees fairly?

As a service industry, PR can be high pressured and unforgiving. As one account director used to say: "There are no marks for effort; the client is interested only in results." In addition most agencies are small firms with no human resources function.

As a result, says Amphlett, social niceties can go out of the window. "Relationships in very small companies can sometimes get very nasty indeed," she observes. That in turn can lead to low productivity and low morale, bullying and ill-health. They are not uncommon causes for legal action by employees who feel they have been unreasonably ground down. "Its important to have ways of picking these things up early," she advises.

Make sure they are not ignored. Have a grievance procedure and regular appraisals. Have equal opportunity and anti-bullying policies in place. But also put in place softer procedures around talking to employees and have a way for them to raise issues informally.

Without them you are likely to hamper productivity and you could end up with claims against you – and remember they can be brought against individuals as well as against the company. The cap for unfair dismissal claims is a year’s salary to a maximum of £69,000. But there is no cap for discrimination or whistle-blowing claims.

Mind you, if you treat your staff with equal disdain, you could always try the ‘bastard’ defence, suggests Amphlett with only a hint of a smile: "That simply says that while you treated somebody poorly, it wasn’t discriminatory because you treat everyone poorly." 

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