$3 million in damages to small businesses

28 April 2010

Fifty-five current and former Allphones franchisees have received payments totalling $3 million from Allphones and its executives for their involvement in unconscionable conduct.

Unconscionable conduct is described as behaviour which is irreconcilable with what is right or reasonable.

The conduct began in 2004 when Allphones commenced a national expansion plan at the direction of its board and newly appointed CEO, Matthew Donnellan. At that time, Allphones structured its franchise system so that the company had control over both the stock and income of franchisees.

As it grew, Allphones represented to potential franchisees that their franchise system was like 'a true partnership' where they shared the profit, assuring franchisees that Allphones would use its bargaining power to their benefit. 

Even while making these representations however, Allphones negotiated commissions and bonuses with suppliers which it did not disclose to franchisees. Allphones also altered documents from carriers, disguising charges.  The court has ordered by consent that in both instances withholding this income was unconscionable.

"This is a blatant case of promising and even contracting to do one thing but doing something completely different – to the detriment of franchisees," acting ACCC chairman Peter Kell said today. 

In 2006, Allphones identified a group of franchisees referring to them in its management reports as 'dickhead franchisees'. To try to ensure franchisees did what they were told, Allphones implemented a business plan targeting franchisees who did not meet performance criteria unilaterally adopted by Allphones, or who were identified as not being 'loyal' to Allphones, to pressure them to sell, transfer or otherwise terminate their franchise. These tactics included:

  • withholding stock
  • stopping a franchisee's income while simultaneously requiring that franchisees continue to bank daily takings in Allphones' account and meet other obligations like rent and wages, and
  • threatening franchisees with 'breach' notices suggesting the company would take steps to terminate their franchise.

By consent, Justice Foster of the Federal Court declared these tactics were unconscionable and that Mr Donnellan, Tony Baker and Ian Harkin were knowingly concerned in the unconscionable conduct.

On a number of occasions where franchisees tried to rely on the Franchising Code of Conduct, and discuss their concerns, or implement dispute resolution procedures, Allphones blocked them.

"Bullying franchisees by withholding stock and income is egregious conduct that will not be tolerated," Mr Kell said. "This is 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."

Justice Foster of the Federal Court declared that since 2004 Allphones engaged in misleading and deceptive conduct, contravened the Franchising Code of Conduct and engaged in unconscionable conduct in its dealings with franchisees. 

By consent, he ordered that:

  • the franchisees be paid $3 million in damages for money that had been withheld
  • the executives Matthew Donnellan, Tony Baker and Ian Harkin had been knowingly concerned in unconscionable conduct
  • a number of injunctions be imposed to prevent similar conduct in the future, and
  • the company, Mr Donnellan and Mr Baker pay the ACCC's costs.

"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. This case builds on a number of others where the ACCC has taken action to protect the rights of small businesses," Mr 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 amongst the franchisees represented by the ACCC according to the timeframe they were a franchisee and duration and performance of their business. The amount paid reflects underpayment of rebates and commissions and implementation of charges by Allphones.

Today's orders do not relate to contempt proceedings the ACCC took against Allphones where the court has reserved its judgment.  The orders are also in addition to a number of other injunctions obtained by the ACCC against Allphones in 2008 and 2009 preventing misleading and deceptive conduct, breaches of the Franchising Code and unconscionable conduct.

Release number: 
NR 089/10
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