On November 29, 2024, the German Federal Cartel Office (“FCO”) concluded that Microsoft’s hiring of nearly all of Inflection AI, Inc.’s (“Inflection”) employees together with agreements on financing and the use of Inflection’s intellectual property amounted to a “concentration” under German merger control law. However, due to the lack of “substantial domestic operations” at the time of the acquisition, the FCO declined jurisdiction to review the case.[1]
Background
On March 19, 2024, Microsoft announced that it had hired Inflection’s two co-founders and that “several members of the Inflection team” had decided to join them to form “Microsoft AI”, the software company’s new AI branch.[2] Inflection, a technology company founded in 2022, claims to have trained one of the world’s best large language models (“LLM”) and had developed its own artificial intelligence chatbot called Pi.[3] In addition to hiring its key personnel, Microsoft acquired a non-exclusive license to this LLM and entered into funding agreements with Inflection.
The case attracted the interest of several competition authorities around the globe. On September 4, 2024, the UK Competition and Markets Authority (“CMA”) issued a Phase 1 decision, finding jurisdiction but clearing the transaction for lack of competitive concerns.[4] On September 18, 2024, the European Commission (“Commission”) which had been reviewing the transaction following a referral by several Member States, announced that it would not take a decision on the matter due to lack of jurisdiction.[5] Following the ruling of the European Court of Justice (“CJEU”) in the Illumina/Grail case,[6] all Member States had decided to withdraw their referrals pursuant to Art. 22 EU Merger Regulation (“EUMR”). However, the Commission has clarified that the transaction constitutes a concentration under Art. 3 EUMR.[7] The deal is also under investigation by the Administrative Council for Economic Defense in Brazil.[8]
FCO Decision
Following the Commission’s withdrawal, the FCO decided to review the transaction, focusing on two key issues:
- Whether the transaction constituted a concentration within the meaning of Sec. 37 of the German Act against Restraints of Competition (“ARC”).
- Whether the transaction was notifiable under the transaction value threshold of Sec. 35(1a) ARC.
In addition to the hiring of Inflection’s key personnel, the FCO reviewed various agreements between Microsoft and Inflection and between Microsoft and Inflection’s shareholders. These included, in particular, Microsoft’s rights to use Inflection’s LLM, i.e., its key IP, and financing agreements. The FCO confirmed that the hiring of Inflection’s employees and the acquisition of IP in conjunction constituted a “de facto takeover of Inflection by Microsoft.”
However, the FCO found that it did not have jurisdiction to review the transaction. While the transaction value exceeded the relevant threshold of €400 million, Inflection did not have significant domestic operations in Germany at the time of the acquisition. Pursuant to its Guidance Paper, the FCO considers the number of “monthly active users” (MAUs) as an appropriate alternative factor to turnover for assessing domestic effects in the digital economy.[9] In making this assessment, the FCO specifically noted the small number of chatbot users in Germany.
Conclusion
This decision illustrates the ongoing efforts of competition authorities to expand their merger investigation powers to capture novel types of transactions, particularly in the digital sector. Two points bear particular mention:
First, this case highlights once again[10] the importance and – from an enforcer’s perspective – the benefits of a transaction value-based threshold to capture a broader range of transactions. This is particularly important for nascent markets such as AI. Going forward, it is likely that other regulators will follow the German (and Austrian) approach, particularly in light of the recent limitations on the Commission’s review powers following the CJEU’s Illumina/Grail decision.
Second, this decision significantly broadens the definition of “concentration” under German merger control rules. The FCO had previously been reluctant to find a concentration in cases involving the mere hiring of employees.[11] In line with the Commission’s new approach, the qualification of a so-called “acquihire” as a concentration may signal a shift in the FCO’s decision-making – at least in cases where the hiring of employees is accompanied by the licensing of IP and/or other contractual agreements between the parties. It remains to be seen whether and to what extent this interpretation will withstand judicial review.
Both developments are likely to create additional uncertainty for companies in determining their merger filing obligations in Germany (and Austria, which applies the same scheme with even lower thresholds). This is likely to increase even further following recent statements by the FCO President Mundt suggesting that the transaction value threshold should be lowered from €400 to €300 million in the next amendment of the ARC, due next year, and that “possible or future” activities of the target should be taken into account in the assessment of the local nexus.[12] Today, only current domestic activities of the target can be taken into account.
[1] See the FCO’s Press Release of November 29, 2024, available in English here.
[3] Inflection, Press Release, “The new Inflection: An important change to how we’ll work”, March 19, 2024, available here.
[4] Microsoft Corporation’s hiring of certain former employees of Inflection and its entry into associated arrangements with Inflection (Case ME 7103/24) Decision of September 4, 2024, available here.
[5] Commission Press Release IP/24/4727, „Commission takes note of the withdrawal of referral requests by Members States concerning the acquisition of certain assets of Inflection by Microsoft”, September 18, 2024, available here.
[6] Illumina and GRAIL and Commission (Cases C-622/11 and C-625/22) EU:C:2024:677. For more information on the case’s background, please see our article available here.
[7] Commission Press Release IP/24/4727, cf. above.
[8] Microsoft e InflectionAI (Case 08700.005966/2024-33) Order of December 2, 2024, available in Portuguese here. News outlets also reported that the U.S. Federal Trade Commission was investigating the transaction , see Wall Street Journal, “FTC Open Antitrust Probe of Microsoft AI Deal”, June 6, 2024, available here.
[9] Guidance on Transaction Value Thresholds for Mandatory Pre-merger Notification (Section 35 (1a) GWB and Section 9 (4) KartG); available here, para. 67.
[10] See the FCO’s investigation into Microsoft’s cooperation with OpenAI, where the FCO also concluded that it did not have jurisdiction; see press release of November 15, 2023, available in English here. For more information, see our blog article available here.
[11] See FCO, Activity Report 1991/1992, WAZ/Ostthüringer p. 126, available only in German here. Similarly, the FCO did not take action in CTS Eventim/FourArtists, when – after the FCO had prohibited the proposed acquisition of FourArtists by Eventim (decision of November 23, 2017, B6-35/17, available only in German here) – the majority of employees from Four Artists switched to a subsidiary of Eventim; see Tagesschau, “Expansion am Kartellamt vorbei”, June 3, 2023, available only in German here.
[12] Global Competition Review, “German authority wants rule to change to catch AI partnerships, voices call-in concerns”, November 27, 2024, available in English here.