The Federal Trade Commission is investigating whether Microsoft structured one of its recent deals with an artificial intelligence startup to avoid government antitrust review of the deal.
Microsoft hired Inflection AI's co-founders and nearly all of its employees in March and agreed to pay the startup about $650 million in licensing fees to resell its technology, which Inflection investors were told would be repaid over time with proceeds from the sale.
Companies are required to report any acquisitions totaling more than $119 million to federal antitrust enforcement agencies, which have the right to investigate the deal's impact on competition. The FTC and Department of Justice, which share antitrust powers, can sue to block a merger or other investment if their investigations find that the transaction would substantially lessen competition or lead to a monopoly.
The FTC is already scrutinizing AI investments by major companies like Microsoft and Google parent Alphabet, and FTC Chairman Lina Khan has expressed concern that tech giants could eventually buy or take control of the most promising AI applications, giving systems the ability to have human-like abilities like conversing, creating art or writing computer code.
The FTC is now scrutinizing the Microsoft-Inflexion deal, seeking information about how and why the companies negotiated the partnership, according to people familiar with the matter and records reviewed by The Wall Street Journal. Civil subpoenas recently sent to Microsoft and Inflexion are seeking documents going back about two years. The FTC is trying to determine whether Microsoft crafted the deal to gain control of Inflexion while avoiding FTC review of the transaction, the people said.
If the FTC finds that Microsoft should have notified the government about its deal with Inflexion and sought an investigation, it could bring enforcement action against Microsoft. It could impose fines on Microsoft and ask the court to suspend the deal while the FTC conducts a full investigation into the deal's competitive effects.
Tech companies often buy startups to acquire talent, a tactic known as “hiring by acquisition.” In Microsoft's case, the company hired Inflexion's dedicated workforce of AI researchers but didn't buy the company outright.
San Francisco Bay Area-based Inflection AI has built one of the world's largest large-scale language models and released an AI chatbot called Pi using its technology. Inflection is one of several technology companies that have built large-scale language models and sold access to them; others include OpenAI, the creators of ChatGPT, and Google.
Microsoft has invested in both OpenAI and Inflection. The FTC launched a broader investigation in January into Microsoft's investment in OpenAI and Alphabet's ties to Anthropic, an OpenAI rival founded in 2021 by former OpenAI engineers.
At Microsoft, Inflection co-founder Mustafa Suleiman and his former team have launched a new division called Microsoft AI, tasked with developing consumer AI products, including the Bing search engine and an AI assistant for Windows.
Inflection continues to operate under new management but has pivoted from its consumer product, Pi, to serving corporate customers.
Inflection's new chief operating officer, Ted Shelton, said he was unaware of the FTC investigation. But he said Inflection was not acquired by Microsoft. “We are a completely independent company,” Shelton said. “Microsoft has no investment in us.”
Shelton added that entrepreneur Reid Hoffman and venture capital firm Greylock Partners are currently lead investors in Inflexion.
The hire is similar to Microsoft's hiring of OpenAI CEO Sam Altman, who was fired by the company's board last November after Altman returned as OpenAI's chief executive officer after a five-day standoff with the board, which claimed Altman had not been fully forthright in its communications with them.
OpenAI's nonprofit board oversees a for-profit arm that has outside investors, including Microsoft, which has invested about $13 billion in OpenAI and earned a 49% stake in any profits the company generates.
Deepa Seetharaman contributed to this article.
Write to Dave Michaels at dave.michaels@wsj.com and Tom Dotan at tom.dotan@wsj.com.
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