Record-high fine for predatory pricing in the Valio case

By a decision issued on 26 June 2014, the Finnish Market Court imposed a EUR 70 million fine on Valio for abuse of dominant position, including predatory pricing. The Finnish Competition and Consumer Authority’s (“FCCA”) investigations showed that Valio had been in a dominant position in the production and wholesale market of fresh milk in Finland and had abused that position.

As of 2009, tightened competition had led to a decrease of price level of the fresh milk in the Finnish market. In the changed market situation, Valio saw the increase of Arla Ingman’s market share and the importation of raw milk from Sweden as threats to its own business. Valio’s loss of position as the main supplier to three local co-operatives of the S Group in the beginning of 2010 led to the situation escalating and to a strategic decision of Valio’s top management to drop the wholesale prices of its fresh milk considerably below variable costs.

The main differences in the viewpoints between the FCCA and Valio concerned the classification and valuation of the raw milk costs in the statements of costs. According to the FCCA, when estimating whether Valio’s conduct could foreclose an equally effective competitor as the dominant position holder Valio from the market, 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.

Due to its superior market position, Valio was able to set the price level for raw milk, and its competitors had 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 was determined by the settlement price of Valio was a variable cost both for Valio’s existing competitors and for its potential competitors that were planning to enter the market. According to legal praxis, setting prices below variable costs is, in itself, a demonstration of abuse of dominant position because it prevents an equally effective competitor from offering products to customers without loss. In addition, the FCCA stated that according to the gathered evidence, Valio was implementing a pricing strategy that was aimed at foreclosure of the markets.

According to the FCCA and legal praxis, certain conduct is also considered abuse of dominant position when the pricing covers variable costs but is below total costs if it can be demonstrated that the aim of the conduct is preventing effective competition. Thus, even if Valio’s prices had been considered to cover variable costs but to have been below total costs, its conduct would have been perceived as abuse of dominant position. On the grounds of the legal praxis of the European Court of Justice, the Market Court found that when estimating whether the pricing of fresh milk was in accordance with competition rules, a cost recovery test based on the distinction between variable and total costs, was to be applied (judgment ECLI:EU:C:1991:286, AKZO v Commission; judgment ECLI:EU:C:1996:436, Tetra Pak v Commission; judgment ECLI:EU:C:2009:214 France Télécom v Commission).

The Market Court held that Valio had abused its dominant position by pricing its fresh milk below average variable costs in the FCCA’s inspection period of 1 March 2010 and 31 August 2012. According to the Market Court, Valio’s conduct aimed at foreclosure of the markets, and the volume discounts that Valio had offered to the S Group underlined the exclusionary impact of setting its price level below average variable costs.

Valio has appealed against the decision to the Supreme Administrative Court where the case is still pending.