The rapid growth of digital markets has created an important shortage of skilled ITC professionals. This shortage is particularly acute in the area of artificial intelligence, where leading technology companies and AI start-ups are racing to hire top tech talent. 

This fight for talent has given rise to practices that attracted the attention of competition authorities. Already back in 2010 the US Department of Justice fined several Silicon Valley technology firms, including Google, Apple, Adobe and Intel, for agreeing not to poach each other’s highly skilled workers. 

Most recently the opposite phenomenon has triggered significant debate: What happens if a tech company hires most of the staff of another tech company? Can competition authorities take action if the hiring company thereby takes over the most valuable asset of the other company and this company subsequently leaves the market?

This is exactly the question with which the European Commission and several national competition authorities have recently been struggling in the Microsoft/Inflection case.

In March 2024, Microsoft announced that it had hired the two co-founders of the AI start-up Inflection as well as most of its staff in a deal valued $650 million. Microsoft also entered into a series of arrangements with Inflection, which included a non-exclusive license for Inflection’s IP. Inflection had developed its own foundation model as well as the AI chatbot Pi.

The first competition authority taking an active interest in the case was the UK’s Competition and Markets Authority (CMA). In April 2024 the CMA issued a call for comments on the arrangements between Microsoft and Inflection, Amazon and Anthropic, and Microsoft and Mistral AI to determine whether these qualified for review under the UK merger control rules and, if so, what impact these deals would have on competition in the UK. In July the CMA opened an investigation into Microsoft’s arrangements with Inflection and concluded that the deal created a “relevant merger situation”. It noted that, by hiring Inflection’s core team, Microsoft “acquired the collective know-how of Inflection’s pre-transaction activities – which in and of itself may be sufficient to constitute an enterprise”. However, the CMA ultimately approved the deal after it found that the relationship did not harm competition.”[1] 

In parallel also the European Commission had started to investigate the situation, but things took an unexpected turn when the EU Court of Justice issued its landmark Illumina/Grail ruling in early September. 

Like the CMA, the Commission had come to the conclusion that Microsoft’s hires from and arrangements with Inflection constituted a “concentration” within the meaning of the EU merger control rules. It found that the deal resulted in “transfer[ring] Inflection’s market position for generative AI foundation models and AI chatbots to Microsoft” and that Inflection’s announced shift to a different activity caused a “structural change in the market”.[2]

However, this did not allow the Commission to review the transaction since the turnover of Inflection did not meet the thresholds under the EU Merger Regulation. The Commission therefore decided to make use of its new “Article 22 procedure”. Under Article 22 of the EU Merger Regulation EU Member States can ask the Commission to review a transaction that does not meet the EU turnover thresholds but affects cross-border trade in the EU and threatens to harm competition in the Member States making the request. In 2021, the Commission decided that, unlike in the past, it would also accept referral requests from Member States where the transaction did not require a merger notification, since this would allow it to review “killer acquisitions” that did not meet the EU or national merger control thresholds.

The Commission therefore invited the Member States to request a referral of the Microsoft/Inflection deal to it for review, and seven Member States followed this invitation.

However, before the Commission was able to formally accept these requests and start its review of the deal, the Court of Justice 's Illumina/Grail judgment stopped the process dead in its tracks. The Court ruled that the Commission’s new Article 22 practice was illegal. As a result, all seven Members States (neither of which had the power to review the deal) were forced to withdraw their referral requests. 

Is this the end of the Microsoft/Inflection saga? 

Paradoxically, Microsoft recently re-started an EU review of the transaction through a formal notification of its arrangements with Inflection to the European Commission. The notification is based on Article 14 of the Digital Markets Act (DMA), which requires gatekeepers to inform the Commission of all planned concentrations involving digital services. Microsoft’s submission makes clear that it disagrees with the qualification of the hires and agreements with Inflection as a “concentration”.

Moreover, the German Competition Authority is still examining whether it has the power to examine the case under the German merger control rules. The Authority recently disclosed that it is assessing whether the deal can be qualified as a concentration and whether it has a sufficient link with the German market. It thus cannot be excluded that the case will have to undergo a second merger control review – and that the outcome of this review may be different from that in the UK.

Does this mean trouble for all acqui-hires?

The term acqui-hire (which was created nearly 20 years ago) describes the acquisition of a small company where the hiring of the company's employees is the primary goal of the transaction. Microsoft presumably would not describe its arrangements with Inflection as an acqui-hire, because it considers that these merely involve a transfer of staff and IP rights and cannot be qualified as the acquisition of a company. 

Acqui-hires in the original sense have always been scrutinized under the merger control rules (provided the relevant thresholds were met). What will change is the level of scrutiny for arrangements that may have effects similar to an acqui-hire, especially if the parties are tech companies and even more so if they develop or use artificial intelligence. 

Competition authorities will examine closely whether these cases can be reviewed under their merger control rules. This will be facilitated by “call-in powers” for arrangements that do not meet the applicable merger control thresholds but could raise serious concerns. The competition authorities of several countries already have such powers (Denmark, Hungary, Ireland, Italy, Latvia, Lithuania, Slovenia and Sweden). Other countries (including the Czech Republic, France, Finland and the Netherlands) are considering the introduction of similar rules. These powers can also be used for referring problematic sub-threshold cases to the European Commission – which is the declared intention of most authorities.
 

[1] See https://www.gov.uk/cma-cases/microsoft-slash-inflection-ai-inquiry

[2] See https://ec.europa.eu/commission/presscorner/detail/en/ip_24_4727 

If you need more information or further guidance in this area, please contact Anne Federle and Aurélie de Amorin.

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