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October 4, 1977

CBS INC., Plaintiff,

The opinion of the court was delivered by: WYATT

This is the decision after trial to the Court without a jury of a diversity civil action in which plaintiff (CBS) claims $ 390,382.48, with interest, from defendant (Stokely) for television advertising. This advertising had been placed for Stokely with CBS by a large advertising agency, Lennen & Newell, Inc. (Lennen). Stokely had paid Lennen for the advertising, but Lennen, which went into bankruptcy on February 2, 1972, did not pay CBS. The issue is thus whether the loss falls on CBS or on Stokely.

Both sides moved for summary judgment. This Court granted summary judgment to Stokely. On appeal, the summary judgment for Stokely was reversed as inappropriate. 522 F.2d 369 (2nd Cir.). The action was remanded for specific determinations, described in the opinion of Judge Oakes, after a trial. There was a trial on January 24 and 25, 1977.


 The remand was to determine after trial (a) "whether there was an agency relationship" between Stokely and Lennen, and (b) "the time that estoppel took effect".

 As to the "agency relationship," it was directed that there be findings (1) "as to the customs and usage of the trade, particularly the usages of the Madison Avenue advertising business" and (2) "whether the making of a contract such as the one here . . . is incidental to or usually accompanies or is reasonably necessary to accomplish the business of supplying commercial television time for . . . advertising". The "customs and usage" referred to is assumed to be with respect to advertising agencies having authority to make contracts binding their advertiser clients to pay to television broadcasters, and actually exercising such authority.

 As to the time when estoppel took effect, this was held to be the time "when it appeared that Lennen was in substantial financial difficulty, and this situation was known to CBS and unknown to Stokely."


 Advertising agencies developed before radio and television. In those days they bought space in newspapers and magazines as principals. They resold the space to advertisers, but if they failed to resell the space the advertising agencies were still liable for it. In order to make sale of the space easier, the early agencies employed writers to produce advertising copy which could be shown to the space prospects; such were the beginnings of the present extensive advertising agency industry. But in those beginning days the publishers of newspapers and magazines looked to the credit of the advertising agencies and not to that of the advertisers; the publishers did not deal with the advertisers but only with the agencies.

 The advent of radio did not change this. The time on radio was bought by the agencies as principals and on their own credit.

 When television came, the situation again did not change at first. The television networks, including CBS, accepted the concept that the agencies were solely liable for advertising time purchased, the same concept early adopted and promoted by the agencies themselves.

 The trade association for advertising agencies is the American Association of Advertising Agencies, often called "the four A's", here sometimes referred to for convenience as "AA". The larger agencies are members of AA, 400 out of the about 7000 total number of agencies; AA members place 75% Of all TV and other advertising. Since at least as far back as 1930, AA has advised a form of contract for advertising between agency and medium which provides that the agency would solely be liable for advertising purchased, and that the advertiser would not be liable. The AA and the larger agencies (including Lennen) believed in this position, believed it was correct also as a matter of law, and promoted it actively in booklets, speeches and the like.

 The position of the agencies that the advertiser is not liable to the medium is in part for selfish reasons. The agencies want no direct dealings between the advertisers and the media, lest this evolve to an elimination of the agencies. The custom and usage has always been, and is now, that CBS and other media send their invoices only to the agencies, that the agencies pay the media and that the agencies (rather than the media) collect from the advertisers. This increases the cash flow through the agencies and is believed by them to improve the standing of the agencies with their banks. The agencies did not want the system changed to one where the advertisers pay directly to the media. Moreover, the position of the agencies, explained to their client advertisers, makes it easier to collect from the advertisers. They are assured by the agencies that there is no possibility of the advertiser paying twice, once to the agency and later to the medium, as would be the case if the present claim of CBS is valid.

 As the volume of TV advertising increased, and the money involved as well, CBS and presumably other networks became concerned that the advertisers be liable ultimately for the advertising time bought for them. In the case of big advertisers, their financial responsibility was much greater than that of the agencies. CBS (and no doubt the other networks) revised its form of contract, at some time between 1950 and 1955, so as to provide that the contract was made with the agency "acting as agent" for the advertiser (who was named in the contract). The contract forms were sent by CBS to the agencies for signature.

 The agencies did not sign the network contracts; the network contracts in suit have no signatures of either party. The reason is that the agencies did not wish to compromise their position that the ...

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