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Is your referral arrangement legal?

I am seeing more business collaborations than even before.  Businesses with a niche are coming together and forming collaboratively offerings e.g. yoga and travel, budgeting and healthy eating, legal and technology.  Business owners are coming together in a variety of ways, through formal or informal partnerships, referral arrangements and profit sharing.

I hate to burst anyone’s bubble and I love these new collaborations, but sometimes – the law says its not ok.  I know.  Funbuster….

Referral Selling is prohibited.

Before you panic – referring someone out of love and respect is OK.  What is not ok is when a business induces a customer to acquire goods or services by representing to that customer that they will receive a rebate, commission or other benefit in return for:

  • Giving the business the names of other potential customers; or
  • Otherwise assisting the business to supply goods or services to other customers

if the customer’s receipt of a rebate or commission or other benefit is dependent on the other event occurring after the contract is made.  This is what I mean:

ABC Biz has a promotion.  I receive their email which says “Buy our new TV – refer five friends and get $100 off the price”.  ABC Biz asks me to give them the names and email addresses of five friends.  I do, and I get $100 off the price of my new TV. 

This is referral selling, and it is illegal.

Exclusive Dealing is prohibited. 

Certain arrangements are considered “Exclusive Dealing”.  There are a number of arrangements that could be Exclusive Dealing, but the one I most commonly see with small business is where a company gives a rebate or discount in relation to its services on the condition that the customer acquires services from a certain third party business. It looks like this: 

If you buy my product, you will receive a 10% discount if you get your product serviced by my referral partner XYZ Biz.  The customer only gets a discount if they use the services of the referral partner.

At a first glance, this may appear to be what the broker is doing.  However, they are actually offering the rebate on the condition that the client goes back and uses their own services.  The rebate is not conditional on the client using your service . However, if a broker doesn’t word this right, they could put themselves (and you) in the firing line for Exclusive Dealing. 

But we are just trying to support each other in business

Yes I know, and that is great – I love collaboration.  Often laws make sense if you understand where they are coming from.  These prohibitions exist in the Australian Consumer Law, which means they are more understandable if you think of them from a consumer protection perspective.

Imagine a world where you buy a new computer from Harvey Norman.  Harvey Norman gives you a $100 rebate if you get your software installed by Ted Norman (Harvey’s brother).  But you can install the software yourself.  Why should you go to Ted?  Its not fair, the price should be price, why do you have to spend money with Ted to get the rebate?

The arrangement between Harvey and Ted creates an exclusive relationship and makes life harder for cousin Nancy Norman down the road, because she can’t compete with that deal.  It is anti-competitive, and reducing competition means there is less choice for consumers.

But how can I work collaboratively?

Where there is a will there is a way!  I know your goal is to combine your awesome services to provide a unique product offering.  You don’t intend to be anti-competitive.  Which is great.  It means that with the right advice you should be able to structure your collaboration in a way that is not breaking the law.