What is a Mutual Referral Agreement?
A mutual referral agreement is a contractual agreement between two parties that stipulates both will refer business to the other. The basic idea of such agreements is to reduce the cost of acquiring new customers by being able to rely on other businesses to supply either information or clients.
For example, a physical therapist and local doctor may enter into a mutual referral agreement where each agrees to refer clients to the other. If a doctor has a patient with pain that is not resolving with medical therapy , the doctor may wish to refer the patient to a physical therapist. Alternatively, a physical therapist may have a client that has not seen improvement with traditional therapy and may wish to refer the patient to a physician for an evaluation. Under this agreement, the physician and the therapist would be more likely to refer if they knew the other had a client to send.
Mutual referral agreements may be appropriate in a wide variety of industries. Some examples:
Elements of a Mutual Referral Agreement
While mutual referral agreements can take various forms and include a plethora of specific elements, the following basic components are generally found in most of these agreements:
Vertical Elements. Within mutual referral agreements, there are usually vertical elements, where the agreement is between professionals at different levels (e.g., salesperson to manager), or horizontal elements, which are agreements between those at the same level. Because mutual referral agreements are generally not prohibited by antitrust law, it is important to determine whether you are entering into a vertical or horizontal agreement. If it is a vertical agreement, many times it will be permissible. However, with regard to horizontal agreements, there is a presumption that the referral arrangement will be anticompetitive.
Commission Structure/Fees. Simply put, some members of a mutual referral agreement will be earning commissions when business is referred. Therefore, a clear explanation of how commissions or referral fees will work is critical to having an enforceable mutual referral agreement.
Confidentiality. In many cases, a mutual referral agreement is going to include a confidentiality provision. This means that those involved in the agreement agree to keep information confidential that is obtained because of the agreement. A breach of confidentiality could lead to the agreement being voided or one party taking another to court.
Termination. As with any contract, there will be reasons for a mutual referral agreement to be terminated during the life of the contract. Therefore, all parties to the agreement need to agree on the circumstances where the mutual referral agreement may be terminated.
Advantages of Mutual Referral Agreements
The value of entering into referral agreements that benefit both businesses (and not just one-way) is that they are mutually beneficial, and therefore meaningful to all parties.
In addition to promoting possible new business, carefully thought out and negotiated referral agreements can lay the foundation for mutual growth, act as a catalyst to access a new or existing market that may have previously been unavailable, build a network, and strengthen existing business relationships.
Legal Issues and Best Practices
A mutual referral agreement must comply with all applicable federal and state laws, including the anti-kickback statute, the physician self-referral law (also known as the Stark Law), the "arrangement" condition of Medicare certification for hospitals and other Medicare-participating healthcare entities, the Civil Monetary Penalties Law, and the prohibition on beneficiary inducements. A mutual referral agreement that does not meet all these requirements may be found to violate one or more of them, resulting in extensive financial and other legal sanctions to the parties to the agreement. In addition, an agreement that does not comply with the Stark Law will result in disallowance of reimbursement for services provided by the hospitals or physicians who are parties to the agreement, as well as liability for reimbursement paid by a federal healthcare program to the parties. Criminal penalties for violations of the anti-kickback statute or the Civil Monetary Penalties Law can include imprisonment of up to five years, as well as fines of up to $25,000 for each violation; civil money penalties of up to $50,000 for each violation may also be assessed. In addition, in certain circumstances, an individual who has been convicted of violating the anti-kickback statute may be excluded from participation in Medicare and other federal health care programs.
Most mutual referral agreements do not require the referral of any minimum volume of services, although either party may establish a minimum volume of referrals below which the parties will no longer do business with each other. When such minimum volume standards are set forth in a mutual referral agreement, parties should structure the agreement so that they are documented as establishing fair market value compensation that is not related to the volume or value of referrals. To do otherwise would subject the parties to additional scrutiny under the anti-kickback statute and the Stark Law, and could result in violations of other laws as well.
Because of the numerous legal considerations involved and the potential for substantial penalties, it is crucial for parties to seek legal advice when drafting a mutual referral agreement. With such advice, such parties will be able to draft a mutual referral agreement that meets their respective needs while also conforming to all regulatory requirements, and thus avoid the risk of illegal referrals, fines and other legal penalties.
Common Pitfalls and Solutions
Mutual referral agreements are generally contractual in nature, and while an agreement may be drawn as a result of negotiations and discussions between two professionals or practitioners, when in writing they are considered a contract, and those entering into them are bound by their terms, which may be challenged if not clearly or unambiguously followed. An example is that professionals or practitioners adding, deleting, or changing a referral source during the term of the referral agreement may have breached the referral agreement, and such a breach may be technically excused if in good faith then-necessary or otherwise required. In addition, if a professional or practitioner joins together with another professional or practitioner to increase the chance that one will refer a patient or business to the other, the two may have engaged in an anti-competitive collusion, a violation of antitrust laws; however, there are certain exceptions under the law.
By the same token, when a mutual referral agreement includes strict or ambiguous terms of compliance, a professional or practitioner may have been non-compliant, and a challenger may have claimed lost revenue as a result, e.g., where the parties did not follow the terms of building specific minimums of referrals into the contract so as not to violate other laws, or where the parties did not document all referrals and invoices in their own record-keeping documentation , as required pursuant to the agreement, e.g., for tax purposes or otherwise. As such, as with any contract, a mutual referral agreement must be unambiguous, include sufficient terms of compliance, and may require an "exit clause" in the event the parties are no longer able to comply.
In sum, the biggest challenges that may arise in mutual referral agreements are:
● costs;
● practices;
● responsibilities; and
● breach (including potential breach).
Strategies for avoiding or minimizing any eventual issues with a mutual referral agreement include teaching or reinforcing with professionals or practitioners any problems that may arise when the arrangement is challenged or questioned in disputes, e.g., violations of antitrust and related laws, under-stated referral revenues, even denied tax benefits. In addition, any professional or practitioner entering into a mutual referral agreement may be careful to comply with the terms of the agreement, and such agreement should be independent of other interrelated agreements (e.g., individual referral agreements, e.g., where there are various multiple providers involved, or may involve other terms or obligations in addition to referrals). In order to minimize or avoid future problems, a mutual referral agreement should cover any and all of these areas of concern or dispute that may arise.
Creating Your Own Mutual Referral Agreement
Drafting a mutual referral agreement begins with a series of discussions between the advisors involved. Only through this dialogue will all parties fully understand their own needs as well as those of the others, allowing them to create an agreement that meets everyone’s specific requirements. Once discussions have concluded and the advisors have a clear understanding of what they want from the arrangement, they will need to make the agreement a legally binding document. If an advisor has experience with drafting contracts, they can write up the agreement themselves. However, because every referral agreement is unique, and because there can be significant penalties for any mistakes, it may be advisable to consult with an attorney before finalizing the agreement, especially if the referral relationship is highly valuable or complicated. Alternatively, customizable templates or online legal services can help advisors draft their own agreements. As with any legal document, the agreements should also be executed in writing, with all of the relevant details clearly spelled out. Generally speaking, here are some of the most important details a mutual referral agreement will likely include: Because a mutual referral agreement is an introduction-based agreement that typically operates without the exchange of any capital, these documents are often exempt from certain law regulations that affect more traditional contractual arrangements. That said, such contracts are not entirely free of all legal oversight. Mutual referral agreements are often drafted pursuant to the laws of the state in which all parties live or work, and the agreements will therefore be subject to the terms of those laws. In addition, as with any other sort of contract, mutual referral agreements can contain unlawful provisions—adding such provisions can put the advisor at risk of receiving fines or other penalties. As a rule of thumb, advisors should avoid including any terms in their mutual referral agreement that may contradict relevant state or federal laws.
The Future of Mutual Referral Agreements
The future of mutual referral agreements looks bright as they can bring together firms that might not have met otherwise, creating new and exciting opportunities. For instance, an engineering firm that does seismic work for the energy sector might never have connections to a borehole inspection company until a law firm referred them to one. These relationships can be mutually beneficial for several years with little to no external friction, meaning it is only a matter of time before the innovations of the future mean that these kinds of agreements will likely continue to grow.
As technology continues to evolve, the use of digital tools such as online platforms and social media networks may also become common ways for firms to find partners. For example, a law firm may join a professionals-only group on Facebook where they can find opportunities to connect. However, opportunities may vary depending on the network as some may offer more valuable connections than others or require members to pay to stay in touch over time.
There are also other ways in which the future of mutual referral agreements may evolve. Some firms may want to focus on specific types of business or industries to establish themselves as leaders. Alternatively, they may want to target professionals at larger, more established companies to help drive their own reputation .
A more recent development that may impact the future of mutual referral agreements is the prevalence of artificial intelligence (AI) tools like chatbots, which many professionals already encounter when trying to contact a business. These tools have continued to develop at a rapid pace, and while they are mostly used to handle simple questions, this technology may eventually become advanced enough to help connect professionals more effectively than ever before. For example, while traditional referral networks often required professionals to spend a lot of time on the phone or in person searching for leads, AI chatbots can connect them with hundreds of people around the world in minutes without any additional cost.
As such, it is likely that the future of mutual referral agreements will be marked by their increasing monetary value and global reach. It is also likely that firms will begin identifying laws or regulations from jurisdictions around the world that affect them. This means that businesses may be more interested than ever before in finding lawyers who can assist them with compliance in those international markets.
The future of mutual referral agreements certainly looks bright for most businesses, and it is frequently in the best interest of professionals to engage in these agreements whenever possible. As such, it is essential for firms to stay up to date on the latest trends in the industry to ensure that they get the best return on their investment from these agreements.
