Damages of $3 million are to be paid to 55 existing and past franchisees in the Allphones network after the Federal Court declared the company had engaged in unconscionable conduct and breached the Franchising Code of Conduct.

The Australian Competition and Consumer Commission undertook a class action on behalf of the franchisees and agreed the settlement with Allphones.

Peter Kell, acting chairman of the ACCC described the company’s actions as “some of the worst conduct encountered by the ACCC in dealing with franchisees. It was both systemic and prolonged. I can only imagine how a franchisee caught on the wrong side of such policies, with their livelihood on the line, must have felt.”

The tactics employed by the franchisor against a group of franchisees described in management reports in 2006 as “dickhead franchisees” included pressuring them to sell, transfer or terminate their franchise by withholding stock, stopping the franchisees’ income while insisting the franchisees bank daily takings and meet rent and wages obligations, and threatening franchisees with breach notices.

Justice Foster of the Federal Court declared these tactics unconscionable, that CEO Matthew Donnellan, and executives Tony Baker and Ian Harkin were knowingly involved and ordered a number of injunctions be imposed to prevent similar conduct in the future.

Donellan was appointed CEO in 2004 and restructured the franchise system to give the company control over both the stock and income of its franchisees. Allphones claimed it would use its bargaining power to benefit franchisees and that the system was like a profit sharing partnership.

However the franchisor did not disclose negotiated supplier commissions and bonuses, and altered carrier documents to disguise charges. The court found withholding income in both these instances to be unconscionable.

Kell said “This is a blatant case of promising and even contracting to do one thing but doing something completely diffeent – to the detriment of franchisees.”

And when franchisees tried to use the Franchising Code of Conduct to rectify their situation they were blocked by Allphones.

“Bullying franchisees by withholding stock and income is egregrious conduct that will not be tolerated,” said Kell. “This is an important result for the franchisees. But just as importantly it sends a broader message to franchisors and those who advise them, that compliance with agreements is fundamentally a two-way street,” he said.

“Franchisees can pay significant sums, some investing more than their net worth, for the opportunity to get involved in a franchise system. In this case some franchisees found that Allphones not only shifted the goalposts but imposed hefty unwritten sanctions.”

The $3 million payment to franchisees reflects underpayment of rebates and commissions and implementation of charges by Allphones.