US–EU Safe Harbor – Struck Down!


1.   CJEU finds Safe Harbor Invalid

In a landmark ruling delivered today, Europe's highest court, the Court of Justice of the European Union (CJEU) declared that the EU Commission's U.S. - EU Safe Harbour regime is invalid.  Now over 4400 U.S. entities that rely on Safe Harbor and their millions of EU based customers, partners and affiliates face the prospect of personal data transfers between them being unlawful.

You can read about the background to the decision and commentary on the CJEU ruling towards the end of this alert.  However, important commercial implications arising from the decision and what businesses should be thinking about now are discussed directly below.

2.  What now?

While this is undoubtedly a game changer from a privacy and international data transfer perspective, it is unlikely that we will see a rush of regulatory action against organisations that today find themselves without a legitimate transfer mechanism in place.

Regulators will need time to assess how they will approach the CJEU's decision and they are likely to recognise that businesses will need time implement new data transfer solutions. Allocating often stretched and limited regulator resources to proactively policing the CJEU's decision, instead of giving businesses opportunity to naturally adjust, is also unlikely to make good regulatory sense.  In addition, the EU Commission has indicated a desire to carry on its ongoing renegotiation of Safe Harbor with the U.S. Department of Commerce recognising that transatlantic data flows are important to the US and European economies. 

That said, although regulators may be sympathetic and the Commission intends to continue negotiations with the U.S. on Safe Habor, opportunistic individuals and pro-privacy groups or interested stakeholders may take advantage of the present situation to assert legal claims. Businesses will therefore need to work diligently in identifying and implementing alternative transfer mechanisms to mitigate legal risk.  

3.  What should we do as a business?

U.S.-based cloud service providers, data analytics providers, data storage providers, social networks and a range of other businesses that have built their data transfer models on Safe Harbor will now need to quickly implement new solutions. EU customers using U.S. based services or working with U.S. partners should also consider on what grounds they can legitimately transfer personal data to the U.S. Internal group transfers from EU group entities to U.S. group entities based on Safe Harbor will also need to be reviewed. 

For many, putting in place EU Model Clause Contracts (a set of EU approved clauses for data transfers) is the best (and only) immediate viable option. Long term, companies should consider implementing intra-group agreements or binding corporate rules (a set of corporate rules which are approved by EU data protection authorities) as these can offer more scalable solutions that do not require a new contract to be entered for each new data transfer.

The nature of your business will determine which solution is most appropriate, but possible scenarios could include: (i) incorporating Model Clauses as part of standard terms and conditions with customers; (ii) developing intra-group agreements or binding corporate rules for the transfer of personal data between group entities; (iii) use of binding corporate rules (for processors) by service providers in order to allow their customers to transfer personal data to their business's U.S. operations; (iv) maintaining data within the EU via a private cloud or localised data processing arrangement; and (v) using a EU based group entity as the customer facing service provider. 

Immediate remediation steps for business customers relying on Safe Harbor

  • Do not panic! Transfers of data to the U.S. should continue as you explore a pragmatic approach to gradually reducing your risk exposure.
  • Review the companies that you are working with, and compile a list of U.S. based service providers, partners and group entities to which you transfer personal data.
  • Consider what, if any, personal data you are transferring to these entities. For each entity compile a brief overview of the type of personal data they have access to so that you can assess risk.  Transfers involving high volumes of data and sensitive personal data (e.g. health data, criminal records, trade union membership lists, information about sexuality or political or religious belief) should be considered as high priorities for addressing.
  • Review the data transfer mechanisms you rely on to send personal data to the entities you have identified. Document which entities you transfer personal data to under Safe Harbor.
  • For the entities that you identify as receiving personal data from you under Safe Harbor, consider how to address the EU restriction on data transfers going forward. Think about things such as: will the companies you transfer data to enter into Model Clauses with you; what rights do you have to request/force them to enter into Model Clauses under any contract you have with them; have they made any statement about how they are going to address the issues arising from the Safe Harbor decision; and is it possible for them to provide their services without a transfer of data outside of the EU (e.g., can they provide the services using EU-based servers?).

Immediate remediation steps for business to business service providers relying on Safe Harbor

  • Do not panic (see above)! Be prepared for you customers to contact you and ask you what you are doing or consider pro-active communication in order to demonstrate that their concerns are your concerns and that you are in control of the situation.
  • Pro-active communication (at least for high value accounts) may also help reduce the efforts associated with dealing with individual client requests. However, you should consider waiting until you know what you are going to do.
  • For immediate questions you receive from customers, consider telling them that, like many other businesses, you are now considering your approach, but that you will continue to follow principles of good information handling to keep their data secure. Reassure them that the decision has not impacted the high standards to which you provide your services. If you are getting lots of questions consider FAQs on your website and briefing frontline staff. Most customers will just want to be assured you know about this and are taking steps to address it.
  • Consider what data transfer solution is best for you. Be ready to start entering into Model Clause contracts with EU-based entities (particularly your EU customer base). For internal group transfers, consider developing intra-group agreements and binding corporate rules. Alternatively, consider if you can provide your services from within the EU or without transferring personal data outside of the European Economic Area (EEA).
  • Finally, review your contracts with customers and make sure you know what consequences arise from Safe Harbor no longer being available. Are you in breach? Are you obligated to enter into Model Clauses, are there timeframes to achieve this and can the customer terminate the agreement if there is not legitimate transfer mechanism?

Immediate remediation steps for U.S. based consumer facing service providers

  • Do not panic but be prepared for your users to contact you and plan your response. You will probably want to reassure them that their data is secure and being handled in accordance with your privacy policy, the Safe Harbor decision does not change this.
  • You should review how you gain consent from your users for data transfers and consider to what extent this can form the basis for data transfers going forward. To date, European privacy regulators have been reluctant to accept consent as a valid data transfer method for ongoing and systematic data transfers. Therefore other solutions will also need to be considered. One approach could be to establish a European subsidiary that is responsible for providing services to your users, this subsidiary could then enter Model Clauses with its U.S. parent for the transfer of personal data to your U.S. operations. Longer term options could also include developing BCRs for your organisation.

Immediate remediation steps for internal transfers of employee data

  • Do not panic! Immediate solutions include entering Model Clause contracts between U.S. and EU-based entities. In the longer term consider developing intra-group agreements and binding corporate rules. Alternatively, consider if you can process employee data within the EU or without transferring data outside of the EEA.
  • It is probably unlikely that employees will ask about the Safe Harbor decision but, if they do, be ready to explain that you are looking at alternative ways to transfer their data. You may want to emphasise their data is still secure and this will not impact when they are paid or receive any benefits they are entitled to.

4.  Longer term implications

The EU Commission has indicated a desire to carry on its ongoing renegotiation of Safe Harbor with the U.S. Department of Commerce, recognising that transatlantic data flows are important to the U.S. and European economies. It is unclear, however, whether the decision of the CJEU will strengthen the hand of the Commission such that it can develop a solution that is considered to comply with the requirements of the Data Protection Directive. 

Moreover, the full implications of the CJEU decision will also need to be considered. Do other transfer mechanisms such as Model Clauses and Binding Corporate Rules offer any greater protection from U.S. law enforcement access? Should data protection authorities review such transfers mechanisms and, if these transfer mechanisms are not sufficient, on what grounds can U.S. data transfers take place?

It may be good to know that the CJEU decision does not appear to permit national regulators to unilaterally declare the EU Commission's findings invalid. In fact, regulators will still need to seek legal redress and the CJEU's decision on the validity of any Commission's adequacy findings before they can suspend data transfers under other data transfer mechanisms. This reasoning should mean that transfers to the U.S. made subject to mechanisms such as EU Model Clauses or BCRs, are not immediately under threat from national regulators.

5.  Background to the decision

The EU Data Protection Directive only allows the transfer of personal data to countries outside of the EEA if the country the data is being transferred to offers an adequate level of protection for personal data. Usually this means that the country has similar data protection laws to the EU. The privacy laws of the U.S. are not considered to offer this level of protection.

In order to help overcome this restriction the EU Commission and the U.S. government put in place the U.S. – EU Safe Harbor Framework, which allowed U.S. entities to self-certify compliance with certain privacy principles in order to receive personal data from the EU.

Maximillian Schrems, an Austrian citizen, lodged a complaint with the Irish data protection authority in relation to the transfer of his personal data by Facebook to the U.S. under the Safe Harbor scheme. Mr Schrems compliant focused on the fact that, in the light of the revelations made in 2013 by Edward Snowden concerning the activities of the United States intelligence services (in particular the National Security Agency), the law and practice of the United States do not offer sufficient protection against surveillance by the public authorities of the data transferred to that country.

The Irish data protection authority rejected the complaint on the grounds that the U.S. – EU Safe Harbor scheme ensured an adequate level of protection of the personal data transferred to the U.S. As the transfers to Facebook in the U.S. were being made under that Safe Harbor scheme no further review was required. Schrems took his complaint to the High Court of Ireland which subsequently referred the case to the CJEU.

6.  Questions before the CJEU

The CJEU was asked to rule on whether: (i) U.S. – EU Safe Harbor scheme has the effect of preventing national data protection authorities from investigating a complaint alleging that a country outside of the EEA does not ensure an adequate level of protection; or (ii) whether in fact, national data protection authorities must conduct their own investigation into the adequacy of Safe Harbor in the light of factual developments that have occurred since the EU Commission's Safe Harbor decision was first published.

7.  What the CJ EU decided

In reviewing the questions before it, the CJEU found that the U.S. – EU Safe Harbor scheme did not prevent national data protection regulators from reviewing the adequacy of the protection afforded to data transferred under the scheme. Further, the CJEU set out that national data protection authorities should, following a claim, conduct their own investigations as to whether transfers subject to a Commission decision comply with the Data Protection Directive's requirements. If the authority has doubts regarding the validity of the decision it may then challenge the Commission's decision before court. However, it is only the CJEU that can declare a decision invalid.

In this instance, the CJEU took the opportunity for review presented to it by the Schrem case and declared the Commission's decision on Safe Harbor to be invalid. Due to the invalidity, the CJEU asked the Irish national data protection regulator to investigate with due diligence and to consider suspending the data transfer to the U.S.

Some of the key concerns raised by the CJEU in relation to Safe Harbor include: (i) public authorities in the U.S. (including law enforcement) are not subject to Safe Harbor; (ii) national security, public interest and law enforcement requirements of the U.S. prevail over Safe Harbor and require U.S. companies to disregard the protective rules of the scheme where conflict arises; (iii) there are limited means of redress for data subjects in relation to the use of their personal data by law enforcement; and (iv) processing of personal data transferred to the U.S. occurred for purposes that are incompatible with the purpose it was originally collected for and which go beyond what is strictly necessary and proportionate for the protection of national security.

The Irish data protection authority is now required to examine Mr Schrem's compliant again and determine, in the absence of Safe Harbor, whether the transfer of personal data to the U.S. should be suspended on the ground that the U.S. does not afford an adequate level of protection of personal data. The findings of this review will be eagerly waited on by businesses that are reliant on data transfers to the U.S.

You can read the judgement of the CJEU here.