Personally, I believe that each individual's contribution to a group project should be graded individually, especially at this age. There can also be an overall group grade, but a teacher has to recognize that some people work harder than others (real-world employers definitely notice this).
Otherwise, the guy is just putting the diligent students in an impossible situation: either you do everyone else's work secretly or you get a crappy grade. ?? That's wrong.
In the real world, people who don't do any work usually get fired. And if other people pick up their slack, they tend to get rewarded. In school, kids who don't work fail. They don't get a B because Mary or Joey did their work for them. So what exactly is this idealist trying to teach the kids who work? That they have responsibility without authority in his classroom? That they need to play the role of a parent or teacher and harangue the other kids into working? That you can do nothing and still get a good grade, thanks to Mary's efforts? IMO, this is the message he's sending, based on what you've written (maybe there's more to it?).
Personally, I would have a talk with this guy or his boss. But I realize that this is probably futile because he may have made up his mind and the boss may want to protect his staff. Dunno.
