In December 2012, the Finnish Competition Authority ("FCA") proposed that a 70 million euro fine be levied on Valio for abuse of dominant position in the production and wholesale market of fresh milk. The FCA also ordered Valio to cease its antitrust violation which had continued for almost three years. According to the FCA, Valio used predatory pricing in the wholesale market of fresh milk to foreclose effective competition from the market.
The proposed fine would be the second largest ever imposed in the history of Finland for an infringement of competition law and the largest for abuse of dominant position. In addition, it would be the largest fine ever imposed on a single undertaking. In the so-called Asphalt Cartel Case, the FCA proposed a total fine of 100 million euros, which was later reduced to 83 million euros in the Supreme Administrative Court. The highest fine issued for a single undertaking in the Asphalt Cartel Case was 68 million euros, which was imposed on Lemminkäinen Oyj.
The last time the Market Court issued a fine for abuse of dominant position was in 2010, when four telecom companies were fined for abusing their dominant market position in setting prices for subscriber connections. The fines were in total 220,000 euros, varying from 30,000 to 90,000 euros per undertaking. Before the valio case, the largest fine issued for abuse of dominant position, in 2001, was 25 million marks (approximately 4.2 million euros). The fine was imposed on Elisa for abuse of dominant position in the subscriber connections market. In determining the size of the penalty payment in Valio case, the FCA considered the gravity and duration of Valio's misconduct, the size of the fresh milk market, Valio's considerable turnover and the fact that Valio had previously been found guilty of abuse of dominant market position.
Valio is the largest milk processor in Finland. It is the market leader in all main dairy product groups in Finland. According to the FCA, Valio had a market share of over 50 % in the fresh milk market throughout the investigation period. Due to its strong position Valio is able to set the prices in the raw milk market. Morever, Valio's competitors are dependent on it for the procurement of raw milk.
In 2007, Arla Foods AB and Ingman Foods Oy Ab merged to form Arla Ingman. In 2009, Arla Ingman set a goal of reaching a 30% market share in the dairy products market. In addition to Valio and Arla Ingman, there are a few smaller dairies in Finland. The retail sector in Finland is highly centralised, and the small dairies do not have the capacity to meet the two largest retail groups' nationwide demand in the fresh milk markets. Thus, the main suppliers for the two retail groups are Valio and Arla Ingman. Unlike Valio, Arla Ingman does not have the capacity to be the primary supplier for both retail groups.
According to the FCA, Valio's top management made a strategic decision in February 2010 to foreclose competition on the Finnish fresh milk market. As of 1 March 2010, Valio dropped the wholesale prices of its fresh milk considerably below cost. The purpose of the under-pricing was to achieve a position close to a monopoly in the market and thereafter to raise the prices back to the level that existed before Arla Ingman entered the market.
Evidence found by the FCA during its investigations included the e-mails written by the company CEO. In the e-mails the CEO wrote that the aim was to stop the import of Swedish milk and that the company was ready for up to 18 months of struggle to achieve that goal. The FCA states that these e-mails clearly showed the intent of Valio to foreclose competition in the markets. According to Valio, the use of colourful language in work e-mails is normal, and Valio was merely responding to competition, not trying to restrict it.
In early spring 2010, after Arla Ingman had increased its market share in the fresh milk wholesale market, Valio announced that it would reduce prices for all its clients as of 1 March. Arla Ingman responded by matching Valio's price reduction. After that, Valio offered an additional reduction to only one of the two largest retail groups. The additional reduction was conditioned on the group increasing its purchase volumes from Valio. Valio continued to offer extra reductions, conditioned on increased purchase volumes, throughout the years 2010 and 2011. As of the beginning of 2012, the FCA had only monitored whether the costs of Valio's fresh milk business were covered.
The main differences in the viewpoints between the FCA and Valio concern the classification and valuation of the raw milk costs in the statements of costs. According to the FCA, the costs of raw milk in the statements of costs should be based on the price that an equally effective competitor would have to pay for raw milk. The FCA claims that due to its superior market position Valio is able to set the price level for raw milk and that its competitors will have to change their price accordingly, regardless of their company form or the actual profitability of their business. Thus, the purchase price of raw milk that is determined by the settlement price of Valio, is a variable cost both for existing competitors of Valio and for potential competitors that are planning to enter the market.
According to the FCA, the conditional volume discounts as well as the selectivity of the reduction practice have only emphasized the foreclosure effect of Valio's practices. In addition, the FCA states that according to the gathered evidence Valio was implementing a pricing strategy that was aimed at foreclosure of the markets. The FCA states that Valio's strategy was to prevent Arla Ingman from competing on the Finnish fresh milk market, but its conduct also significantly impeded the ability of small dairies to operate on the market. Thus, Valio committed a serious antitrust violation with the aim of harming consumers.
In January 2013, Valio announced widely in public that due to the FCA's decision it was forced to raise wholesale prices by 30%. Valio raised its prices in the wholesale market as of 1 February 2013. After that, the FCA sent Valio a so called "pastoral letter", stating that a price increase of about 10% would have sufficed to cover the average variable costs and thus to end the competition violation. Also, in its letter the FCA reminded Valio of the rules concerning exchange of confidential information between competitors and pointed out that price signalling should be avoided. Some commentators have found it odd that the FCA commented on the price increase of Valio because the FCA is not supposed to have a role in the setting of price levels in general.
The Market Court is expected to start sessions on the Valio case in fall 2013. The Court's decision on the case may be expected in 2014 at the earliest. After the Market Court proceedings have concluded, the parties may appeal the case to the Supreme Administrative Court. Private antitrust proceedings are also possible in the matter.
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