Microsoft/Inflection: Direct Hiring as a New Challenge for Merger Control
Acqui-hiring–a fusion of the words acquisition and hiring–refers to the practice of larger companies acquiring start-ups with the primary goal of integrating the employees of the startup to their own workforce. This practice is not only limited to the tech sector.
direct hire is a variation that is particularly challenging from a merger control perspective. In order to acquire an entire company, the acquiring company can hire key employees directly from the target firm. (ed. ), Wettbewerb auf digitalen Markten, Nomos 2025, p. 115 et seq. Until recently, the German Federal Cartel Office (see Bien/Becker Wirtschaft und Wettbewerb – WuW 2024 p. 81 et sq.) did not see itself as in a position of being able to deal with such cases within merger control. Microsoft’s recent hiring of key developers at AI start-up Inflection has changed this attitude. The headline of a press release issued by the Bundeskartellamt on November 29, 2024 leaves no doubt: “Taking employees over may be subjected to merger control in Germany”. Just two months prior, the European Commission and UK Competition and Markets Authority had both determined that the deal was a merger in the context of merger control. The outcome of the US Federal Trade Commission (FTC) investigation, which has been underway since June 2024 remains pending.–
Formal merger control and substantive merger control
1. In certain cases, the acquisition of employees by a third-party company can be considered a merger. Employees can be a company’s most important asset, along with their know-how (as in Microsoft/Inflection) or business relationships (as was the case in CTS Eventim/Four Artists in Germany, where the artists represented in the agents poached from Four Artists were the customers of CTS Eventim, the acquiring competitor). If the acquired group of workers can be attributed to a distinct, transferable market position that is a relevant part for the target company, merger control law may require notification of such acquisitions as a transfer of assets and/or control (see Bien/Becker WuW 2024 p.81, 82, etc.). ; for a different view see v. Wallenberg, Neue Zeitschrift fur Kartellrecht – NZKart 2023, p. 473, 475).
2. The high threshold requirements that are rarely met in these acquisitions, which often involve a few employees from small startups, have been a major obstacle to scrutinizing them under the merger regulations. In the Microsoft/Inflection matter, the European Commission only asserted their jurisdiction after seven referral requests were received under Article 22 Merger Regulation. The Commission decided to not issue a final decision in the case after the ECJ’s ruling in the Illumina/Grail matter. The Bundeskartellamt determined that it was theoretically feasible to initiate a merger inquiry using a transaction threshold – Microsoft has paid a large price for the takeover – but the review ultimately failed because of the requirement in Section 35 (1a). The number of Inflection chatbot Pi users in Germany was not deemed (yet by the authority) to be high enough. In the German Federal Ministry for Economic Affairs and Climate Action, (BMWK), discussions have already taken place about adjusting transaction thresholds to account for expected increases in domestic users with a high probability (see Kaseberg NZKart, p.1). This worthy proposal should also be taken into consideration by the next government.
With its Towercast decision, ECJ reaffirmed that one can use the Continental Can case law, which allows authorities to use the prohibition of the abuse of a dominant position, in cases where threshold requirements may not be met and hence merger control is not applicable. This approach could be a useful tool to address issues that arise from acquihiring or direct employment (see Becker in: ibid. loc. cit., p. 129 et seq.).
3. The
substantive evaluation
should not be limited by evaluating the risk that the merger will reduce competition in the affected markets (as was the case in the Microsoft/Inflection Case, where the CMA dismissed the concerns about a substantial reduction in competition). Rather, the transfer of employees to a new employer should prompt competition authorities to also examine the potential consequences in labor markets–an area that has largely been overlooked in merger control so far (see Bien/Doganoglu, NZKart 2019, p. 185).From the perspective of the recruited employees, direct hiring may initially seem beneficial–particularly due to the associated salary increases. However, the goal, or at least the effect, of acqui-hiring
and direct hiring can be the elimination of a key competitor in the labor market. This, in turn, may give the acquiring firm a monopsony-like position over specialized workers (cf. Bar-Isaac et al., loc. cit. Cit. cit., p. 125 et seq. ).–Remedies A prohibition of this kind may be a serious interference in the constitutionally protected right to seek employment when the labor market is consolidated and the number alternative employers is limited. To find the right balance between protecting individuals’ rights to freely search for work and keeping markets competitive, you must use the proportionality principle. We will discuss some possible remedies that try to strike this equilibrium.
1. Structural remedies are preferable regarding the objective of effective protection of competition and simple monitoring.
a) When the hiring of a group of employees has led to competition concerns competition in the marketplace, and immediate ex-post remedy that comes to mind would be the spinning off the unit to which these employees belong. Ex ante, however, such a remedy would render the original motive for the merger irrelevant. Given that the firm is interested in the services of these employees which it has hired, it is reasonable to expect that they would not attempt to recruit these employees expecting to see them in the hands of a competing third-party firm as part of an additional transaction.
b) Selling another part of the company or other structurally effective measures on another market appear more realistic. These measures can include, for instance, opening an important infrastructure up to competitors, granting a license for a key technology already developed, or granting special termination right for long-term clients. In each case, the benefits to the third-party market must outweigh any restrictions on competition that may result from the merger. The harms that could arise from the merger/transaction resulting in less competition on the market. This possibility is open to both European and German law based on our interpretation of Article 2(1)a) of Merger Regulation and Section 36(1) sentence 2 No. 1 ARC (the “consideration of the structures of all affected markets”) However, this interpretation is not undisputed.
c) The suggestion to limit the duration of the employment contracts of the newly recruited employees is motivated by the well-known ancillary provisions used in dealing, for example, with vertical mergers where long term supply contracts are required to have a limited duration. However, we believe that such a measure will have only a modest effect on reducing the competitiveness of a market. One concern arises because after the departure of the key employees, the original employer of these individuals–typically a competitor of the recruiting firm — may reduce or halt altogether its R&D activities. This could even lead to the original firm exiting the market, reducing the employment options available to the employees. A further complication is the reaction of the acquired employees to a limited employment contract ex-ante with their prospective new employers due to the competitive implications of a change of employer. It is likely that they will choose to stay in their current (usually permanent) position. This scenario may not be unrealistic in dynamic tech labor market where employers are frequently changing. The original employer may also exert pressure on employees, even if they are well compensated, as was the case in the Microsoft/Inflection deal, by threatening them with the closure of the business unit to which these employers belong. This practice is designed to establish a viable competitor on the market before employees return to the acquiring company. These employees can be assigned to another company on a project-basis and rotate their work between the acquiring and other firms. It is possible to imagine scenarios where these employees would be completely assigned to another company for the specified period. We believe that such a policy could have a greater pro-competitive impact. One can avoid making commitments on the duration of such a remedy, and instead, make the removal of such obligations subject to a review clause with clearly defined conditions.
As an example, consider the Microsoft/Inflection case. The following could have been a possible remedy. Microsoft would have to assign some of the newly acquired employees from Inflection to another competitor in exchange for a fee that is reasonable and commensurate to the market conditions. This obligation could initially be predefined. If, however, it can be established that the competitor has established itself as a viable rival to Microsoft within, say, three years, the authority can eliminate the obligations of Microsoft to assign the employees in question to a competitor.
2. Competition authorities tend to find behavioral remedies less desirable. German law explicitly excludes conditions or obligations that “subject undertakings to ongoing behavioral control
“. The boundary between structural remedies and behavioral remedies that have structural implications is fluid. We believe that authorities should be open-minded about behavioral remedies, as they could be better suited to deal with direct hiring practices. The primary criterion for determining the appropriateness of the remedy should be the protection of competition. In such cases, authorities should not only protect the competitive environment, but also not restrict the freedom of the employee to change employers. In the context of direct hiring, a generous approach to the prohibition on ongoing behavioral control is particularly appropriate. The issue is not just the freedom of the acquirer but also that of the employees who are willing to change jobs. This policy could encourage development efforts at other firms and increase the level of competition in the market. A policy like this would only make sense if these technologies could be used by third party developers in an effective way. This condition would ensure that employees recruited in dynamic labor and product markets can find employment elsewhere without friction. A more dynamic labor market, and the diffusion of talent among many firms, can create a more competitive product market in the long term. One could even imagine combining such a ban on non-compete clauses and FRAND licensing requirements. It would be reasonable to impose behavioral remedies only as long as there are concerns about the competitiveness of the market. Then, these requirements can be eliminated if a sufficient number employees leave the company and a sufficient amount of competition is created in the market. This case could be the beginning of a new era in which competition authorities are more proactive about scrutinizing direct-hiring. The high thresholds for notification still keep many direct hiring cases out of the scope of merger control rules. The CMA allowed the Microsoft/Inflection transaction to proceed because it found no competitive concerns. In cases where there can be objectively proven that there is a potential for anti-competitive effects on product and/or labour markets, the conditions in which a transaction may be permitted remain open. In such cases, it is important to discuss what remedies are useful and effective. Above we have discussed some remedies that are useful to us. This debate is not over yet and future research is needed in this area. In this discussion, an important principle that we have identified is that one must not only think of ensuring the competitiveness of markets but also design policies which protect the interests of employees seeking new opportunities.
* This blog post provides the English-language version of the editorial originally authored in German by the contributors for NZKart 2025 (pp. 41-43).
