Referral selling is unfair and illegal under section 49 of the Australian Consumer Law (ACL).  This doesn’t mean it is illegal to bolster your leads or your sales by paying people referral fees or spotter’s fees. If you as the referrer are transparent with the referees and get their informed consent at the time of the referral, this practice is OK.

Transparency is especially important when you are in a fiduciary relationship with the referrer. Examples of fiduciary relationships include:

  • Agent/Principal
  • Broker/retail client
  • Solicitor/client
  • Doctor/patient
  • Director/shareholder
  • Partner/partner and
  • Trustee/Beneficiary.

Prohibited referral selling

The practice that section 49 of the ACL considers illegal referral selling is slightly different. This section prohibits selling goods and services to consumers by representing to them that:

  • they will receive a discount, commission or another benefit after the purchase has been made, and
  • they will receive this only if the leads provided by the referrer results in further sales.

This type of referral selling is illegal because there is no assurance that such sales will actually eventuate. The representation referred to above does not have to be the sole, or even the main inducement operating on the consumer’s mind when they make the original purchase.

Penalties for prohibited referral selling

The penalties for this type of conduct include:

  • pecuniary penalties (fines) of up to $1.1 million in the case of body corporates and $220,000 in the case of individuals, and
  • civil remedies such as damages, remedial orders or an injunction.

The ACCC provides an example of this type of prohibited referral selling. Consider a sales assistant offering a customer ten free DVDs to go with their new plasma TV. This is offered on the condition that they will give the business the names of five of their friends and that these friends all buy plasma TVs from the business. The ACCC does, however, point out that this type of relationship would be permitted if the benefit was promised just for providing the names of the leads.

Examples of illegal referral selling

Below, we have included some examples of illegal referral selling to help illustrate the concepts behind it.

In ACCC v Giraffe World Australia Pty Ltd (No 2) [1999], before purchasing a ‘negative ion mattress,’ the purchasers were told that they would receive a commission provided that:

  • the others they had referred made similar purchases, and
  • they joined a ‘club’ that the purchasers had joined.

More recently, the worm farm investment scheme in ACCC v Bio Enviro Plan Pty Ltd [2003] involved an illegal profit sharing scheme. In this case, existing members received monthly payments according to the number of new members that they had introduced to the scheme.

Conclusion

If you think that the way in which you are planning to sell your goods or services may infringe the ACL, you should get first speak with an experienced business lawyer. Give LegalVision a call and we can provide you with expert professional advice on your situation for a reasonable fixed fee.

Catherine Logan
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