The long-running battle between the Australian Competition and Consumer Commission and mobile phone franchise chain Allphones has finally been resolved, with the Federal Court ordering the chain and its executives to pay 55 franchises $3 million plus costs for a prolonged campaign of unconscionable conduct.
Following a settlement brokered by the ACCC on behalf of the franchisees, Justice Graeme Foster of the Federal Court found that Allphones and its executives Matthew Donnellan, Tony Baker and Ian Harkin, engaged in “a systematic and prolonged” campaign against a group of franchisees who would not fall into line.
“This is some of the worst conduct encountered by the ACCC in dealing with franchisees,” the ACCC’s acting chairman Peter Kell said in a statement.
“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 ACCC claims the unconscionable treatment started six years ago, when Allphones launched a national expansion plan under its new chief executive, Donnellan.
At the same time, the company restructured its operations such that the company had control over the stock and income of franchisees.
The structure gave the franchisor enormous control over the business. While telling prospective franchisees that system “was like ‘a true partnership’ where they shared the profit”, Allphones withheld income from franchisees by negotiating commissions and bonuses with suppliers which were not disclosed to franchisees, and altering its agreements with carriers, thereby disguising charges.
In 2006, the company took aim at a group of franchisees that were referred to in management reports as “dickhead franchisees” and who were identified as not being loyal to Allphones.
According to the ACCC, they then began “to pressure them to sell, transfer or otherwise terminate their franchise”.
Allphones tactics included withholding stock, stopping a franchisee’s income while still requiring that franchisees continue to bank daily takings in Allphones’ account and meet other obligations like rent and wages, and hitting with them breaches and threats that their franchise could be terminated.
Franchisees who attempted to use the Franchise Code as some protection were blocked from doing so.
“Bullying franchisees by withholding stock and income is egregious conduct that will not be tolerated,” Kell 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 will be divided among the 55 franchisees represented by the ACCC, according to the size, duration and performance of the franchise.
Allphones said in a statement that “understands the seriousness of the matters and the impact of its behaviour on its franchisees.
“The board and management have worked hard over the last three years and have improved the way the company operates with particular reference to its systems and transparency.”
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
