Laws on Referral Selling

Referral selling is any business practice that offers an incentive for a list of referrals. For example, a company might pay customers to receive lists of their friends or purchase a list of customers from a now-defunct corporation. The practice is generally legal and left fairly unregulated, but some professional licensing boards place limitations on referral selling, and some states establish guidelines for how referral sales must be structured.

Some professions prohibit referral selling. For example, professional licensing boards prohibit both doctors and lawyers from accepting a referral fee when they refer a patient or client to another professional. Doctors and lawyers who run afoul of this law can be disciplined and even lose their licenses. It's similarly illegal for professional staff in medical and legal offices to engage in referral selling, so doctors and lawyers should ensure that nurses, receptionists, paralegals and other employees are aware of referral selling regulations.

Referral selling can become illegal when it violates customer privacy. A telemarketing agency that sells customer information to a third party should ensure that the customers it provides are not on the national Do Not Call Registry. If the purchasing party violates this registry by calling customers, it could be fined. Likewise, if your organization has a privacy agreement with customers who use your services or visit your website, you have to abide by the terms of this agreement, and using data for a purpose other than the one the customer has authorized is a violation of the privacy agreement and the customer's rights.

Some states have enacted regulations governing referral selling, so it's important to check state laws, particularly if your business relies heavily on referral selling. In Florida, for example, referral selling is treated as a lottery if a business offers an incentive to a customer in return for a referral when that incentive is contingent upon another event, such as a drawing or the response of the referred customer.

If your business engages in referral selling, advise your customers of the specific process you use, and give customers the option to opt out of having their data sold to a third party. If you offer incentives for referrals, ensure that all customers receive the incentive so your program is neither treated like a lottery nor misleading to customers who believe they will automatically get an incentive.