Is there a referral exemption under the TSR?

  • April 09, 2022
  • Laws
  • 4 Min Read

As enforcement of the Telemarketing Sales Rule (TSR) increases, companies subject to it increasingly look for loopholes and exemptions. One example is the belief that a transaction resulting from an unsolicited referral is exempt. An article from the Nation Consumer Law Center (NCLC) implied as much. We researched the issue and we disagree. Here’s why:

To begin, none of the exemptions in the TSR contain the word “referral.” Although that should end the matter, it’s a bit more complicated than that.

Here’s how that NCLC article put it:

Their article cites 16 C.F.R. § 310.6(b)(4) which exempts:

“…Telephone calls initiated by a customer or donor that are not the result of any solicitation by a seller, charitable organization, or telemarketer, provided, however, that this exemption does not apply to any instances of upselling included in such telephone calls…”

Credit repair companies have relied on that NCLC article and believe that if they receive referrals (unsolicited or otherwise), the TSR does not apply.

We believe the exemption is an “incidental use” exemption (not a “referral” exemption) and selling over the phone to a client referred to you is not incidental use of a phone.

Congress found that “ordinary business transactions which involve incidental use of the telephone, or contact with no initial sales contact directed to a particular consumer, by phone or otherwise, from the seller, are not intended to be included within the definition [of a telemarketer or seller]. Examples of use of the telephone that are not intended to be within the definition include, but are not limited to, a consumer’s calls to order carry-out food or similar products, or a consumer’s calls to hotels or airlines for the purpose of making reservations.” S. Rep. No. 80, 103rd Cong., 1st Sess. 9.

Would referrals fit in that list (those examples don’t require phone sales, credit repair does)?

The FTC said that the “…Rule exempts telephone calls initiated by a customer that are not the result of any solicitation by the seller or telemarketer. The Commission added this exemption to address many commenters’ concerns that the definition of telemarketing might include an inbound call from a customer to make hotel, airline, car rental or similar reservations, to place carry-out or restaurant delivery orders, obtain information or customer technical support, or other incidental uses of the telephone that were not in response to a direct solicitation. This exemption is consistent with Congress’ intent not to cover transactions involving incidental use of the telephone.” 60 FR 30421 (Jun. 8, 1995).

We believe that a referral to a credit repair company is a solicitation (especially if the credit repair company asked for referrals) and, more importantly, that the credit repair company’s sale over the phone is precisely the kind of contact the TSR is designed to regulate as it could not be considered an “incidental use” of the phone. This is especially likely since the TSR applies to inbound and outbound calls for credit repair companies (and other similarly regulated industries).

Consider the intended scope of the TSR and what it was trying to avoid.

Congress said that “telemarketing” should include “only those sales activities that substantially rely upon, and are organized around, the use of the telephone. By defining ‘telemarketing’ in terms of ‘significant use’ of the telephone, the Committee intends the definition to include any plan, program, or campaign which is conducted over the telephone to induce purchases of goods or services during the course of the telephone call, or which is designed so that there will necessarily be substantial reliance on telephone communication.” S. Rep. No. 80, 103rd Cong., 1st Sess. 9. 

Credit repair companies engage in “significant use” of the phone for sales. That doesn’t change (or become “incidental”) just because a lead may come from a referral.

Congress was concerned that “telemarketers may attempt to deceive by painting ‘word pictures’ over the telephone that deliberately obscure or create mistaken assumptions in the minds [of] consumers as to the quality or worth of a good or service.” H. R. Rep. No. 20, 103rd Cong., 1st Sess. 8. For those reasons, the TSR and the law provide that telemarketing means “a plan, program, or campaign which is conducted to induce the purchase of goods or services…by use of one or more telephones and which involves more than one interstate telephone call.” 15 U.S. Code § 6106; 16 CFR § 310.2.

The threat of harm to consumers through verbal misrepresentations over the phone is not cured by a client being referred to a credit repair company.

author avatar
Robert Sigman

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