The corporate behemoth behind franchise chains Michel’s Patisserie, Donut King and Gloria Jeans will pay millions in compensation to franchisees over alleged unconscionable conduct.

Scandal-plagued Retail Food Group, which has been the focus of franchisee outcry in recent years over a string of media exposes about small businesses being shafted, agreed to waive $1.8 million in debts and pay $8 million in compo in a deal with regulators unveiled on Friday.

The legal deal ends a long-running legal battle with the Australian Competition and Consumer Commission, which alleged RFG improperly used a marketing fund and misled many prospective franchisees about the profitability of their stores before selling them.

ACCC chair Gina Cass-Gottlieb said settlement of the case would be more beneficial to affected franchisees than continuing a court battle against RFG, which began back in December 2020.

“We are pleased that RFG has agreed to make payments to certain impacted franchisees,” ACCC chair Gina Cass-Gottlieb said in a statement published on Friday.

“We initially took this action because we were concerned with the alleged conduct and the impact on a number of small business operators.”

RFG became the target of regulator and public scrutiny after an investigation by journalists Adele Ferguson and Sarah Danckert for Nine Newspapers in 2017, which exposed how many franchisees were being ruined financially under RFG and mistreated by the huge corporation.

A subsequent class action alleged that Michel’s Patisserie franchisees were forced to sell “disgusting” frozen foods that put off customers and left their businesses in dire shape.

The set of allegations picked up by the ACCC related to claims RFG made to franchisees before selling them stores, namely failing to declare they were unprofitable before people bought in.

The ACCC also alleged that Michel’s Patisserie franchisees were forced to pay millions into a marketing slush fund that was then improperly used, including to pay RFG’s corporate wages.

RFG to pay millions in compo

Under its deal with the ACCC, RFG has agreed to a compliance program that will require it to report about “actions and payments made” to franchisees, which are due in February 2023.

RFG agreed to compensate affected franchisees through a $20,000 payment plus any initial franchise fees they paid, minus any money paid to them already for plant and equipment.

The franchisor will also waive historical and current debts related to franchise rent payments.

Michel’s Patisserie franchisees will also receive $5 million in compensation over the alleged misuse of their marketing fund, with individual payments to represent an agreed percentage of the marketing fees businesses owners contributed between July 2012 and June 2017.

RFG told investors on Friday that the total compensation package would cost it $8.035 million, while $1.819 million in debts will also be waived.

“The parties have agreed that the proceeding will be dismissed, without RFG making any admission as to the ACCC’s allegations in the proceeding, paying any pecuniary penalty, or being subject to any injunction, disclosure or adverse publicity order,” the company said.