The Office of Fair Trading was yesterday forced to issue a humiliating public apology to Morrisons after admitting making false accusations against Britain's fourth-biggest supermarket chain relating to its ongoing probe into dairy price fixing.
The OFT will also pay damages of £100,000 to Morrisons and meet the legal costs of the supermarket group's libel claim.
The action was brought following a statement made last September by the OFT, in which the regulator accused the group of colluding with other supermarkets to push up the price of butter and cheese in 2002 and 2003. It also claimed that Morrisons had been warned about anti-competitive behaviour.
But yesterday the competition watchdog was forced to admit that no such warning had been issued and that the only proceedings against Morrisons related to the issue of milk prices in 2002.
In its statement the OFT said: "The OFT regrets that the press release contained these serious errors, and wishes to apologise sincerely to Morrisons for their publication."
The watchdog was also forced to clarify comments made in the press statement in which Sean Williams, an OFT executive director, was quoted as saying: "This is a very serious case. We believe supermarkets have been colluding to put up the price of dairy products. Consumers have lost out to the tune of hundreds of millions of pounds."
Yesterday the regulator said: "The OFT wishes to make clear that nothing in Mr Williams' quoted remarks was intended to suggest that the OFT, or anyone within the OFT, had concluded that Morrisons was guilty, or would necessarily be found guilty, of price-fixing in relation to the supply of certain liquid milk products in 2002.
"The OFT has not, and had not at any earlier stage, reached any such conclusion. Nor has the OFT reached any conclusion that Morrisons acted in a manner which it knew to be anti-competitive."
"The OFT regrets any misunderstanding arising from the quoted remarks. It wishes to reassure Morrisons that it remains entirely open-minded about its provisional findings pending its consideration of representations from Morrisons and the totality of the evidence."
The OFT's approach had already come under fire in February when a high court judge accused it of going after "potentially sensationalist publicity".
That the watchdog aims for high profile, headline grabbing scalps is a criticism that has been levelled at the OFT since its powers were beefed up and yesterday's climb down will come as a major embarrassment to John Fingleton, who took over at the head of the regulator in 2006.
The inquiry into milk prices has been a running sore with the grocery industry. Supermarkets argued that the decision to raise prices in 2002 was taken under pressure from the Government, amid concerns at the plight of diary farmers who were seen as being forced out of the industry thanks to the combination of low prices for their supply and the damage inflicted by the 2001 foot and mouth outbreak.
However, critics claimed that there was scant evidence of farmers receiving much benefit from price rises, although the British Retail Consortium has insisted that this is not the case. When the OFT issued its "statement of objection" over the alleged dairy price fixing Sainsbury's, Asda, Safeway, two major dairies – Dairy Crest and Wiseman – and a cheesemaker, The Cheese Company, all agreed to heavy fines for their part in the affair – effectively accepting plea bargains which could have staved off potentially more severe penalties later on. At the time, Sainsbury's chief executive, Justin King, said: "We are disappointed we have been penalised for actions that were intended to help British farmers, but recognise the benefit of a speedy settlement with the OFT."
But Morrisons and Tesco were not part of the plea bargain, with both vigorously denying they were part of any price fixing.
The OFT yesterday indicated that its inquiry remained ongoing and that it would seek to resolve the issue as soon as possible.
The watchdog also said it was "in no position to decide whether there has been a breach of the law until it has considered the responses to the Statement of Objections, including those from Morrisons".
The supermarket chain said it planned to donate the damages to its nominated charities.