EU's Highest Court Declares Safe Harbor Invalid

by Wilson Sonsini Goodrich & Rosati
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Today, the Court of Justice of the European Union (CJEU), the EU's highest court, issued a groundbreaking decision1 that invalidates the EU-U.S. Safe Harbor program.2 Given the widespread reliance on the Safe Harbor framework by more than 4,000 companies on both sides of the Atlantic, this key decision will have a significant impact on companies that transfer data from the EU to the U.S.

The CJEU decision also addresses the authority of EU national data protection authorities (DPAs) to independently investigate international data transfers. The court held that DPAs do have such authority, even if the European Commission has determined that the recipient country provides an adequate level of data protection. This fragmentation of EU data protection law creates significant uncertainty for businesses.

The decision was reached in Schrems v. Data Protection Commissioner, a case in which Max Schrems complained about the transfer of his personal data by Facebook to its servers in the U.S. on the basis of the Safe Harbor framework.

This WSGR Alert provides background on the case, information on the CJEU's judgment, and guidance about the practical implications for companies doing business in the EU.

Background

EU data protection law prohibits the transfer of personal data outside the EU, unless the data recipient is located in a country that is deemed to provide an adequate level of protection under EU law, or if there is another legal basis to provide such adequate level of protection. The U.S. is not deemed to provide an adequate level of protection under EU law; the European Commission has, however, deemed the EU-U.S. Safe Harbor framework to be adequate. Until today's decision, the Safe Harbor has provided a legal basis for participating companies to transfer data between the EU and the U.S. More background on the Safe Harbor framework can be found here.

On November 27, 2013, the European Commission issued 13 recommendations to improve the Safe Harbor framework.3 Since then, the EU and the U.S. have been engaged in ongoing negotiations to address these recommendations.

Facts

Max Schrems, an Austrian Facebook user, claimed that the Safe Harbor framework did not adequately protect his personal data because it allowed disclosures of EU citizens' data to the U.S. National Security Agency (NSA). In 2013, Schrems requested that the Irish DPA investigate Facebook's practices and suspend data transfers to its servers in the U.S. (Facebook's EU headquarters is located in Ireland). However, the Irish DPA considered itself bound by the European Commission's decision of July 26, 2000, which formally recognizes Safe Harbor as a legal basis for transferring data from the EU to the U.S. Schrems appealed the DPA's ruling to the Irish High Court, which asked the CJEU to clarify whether or not a national DPA is bound by the European Commission's Safe Harbor decision.

The CJEU's Judgment and What It Means in Practice

1. Safe Harbor is invalid. The CJEU held that the European Commission's adequacy decision on Safe Harbor is invalid. The judgment goes beyond the question raised by the Irish court (i.e., whether national DPAs are bound by the commission's decision on Safe Harbor). According to the CJEU, the broad national security exception contained in the Safe Harbor framework that allows for disclosures of personal data to law enforcement authorities does not satisfy the standards of fundamental rights in the EU. In particular, the CJEU held that this exception enables disproportionate interference with the privacy rights of EU individuals. In addition, the CJEU emphasized the lack of judicial remedy or redress for EU individuals, including the right to have the data accessed, rectified, or erased, and the lack of oversight powers by national DPAs.

2. DPAs can investigate data transfers based on an European Commission adequacy decision. The CJEU held that national DPAs have the power to investigate claims related to international data transfers, even if they are made in accordance with an adequacy decision issued by the European Commission, such as the Safe Harbor decision. If a DPA concludes that EU personal data lacks protection abroad, notwithstanding an European Commission adequacy decision, the DPA is allowed to exercise its powers under national law.

The CJEU affirmation of the powers of DPAs to conduct their own investigations creates a major risk of fragmentation in the EU internal market. The lawfulness of data transfers will now largely depend on individual and potentially inconsistent decisions of different DPAs. In practice, this means that DPAs that are habitually flexible will allow data transfers to the U.S. and other third countries, while others that are usually more strict may suspend or prohibit data transfers.

3. Prior data transfers under Safe Harbor remain lawful. The CJEU indicates that previous data transfers made pursuant to the Safe Harbor framework remain lawful. Whether companies may continue processing such data remains unclear. Further, any new data transfer for companies that were relying on Safe Harbor now lacks a legal basis and could, in theory, expose companies to liability until they implement an alternative data transfer mechanism. There is a risk that privacy advocates may lodge complaints with DPAs regarding ongoing data transfers made pursuant to the Safe Harbor, and DPAs may open investigations into such transfers. In addition, companies operating in the B2B context are likely to receive questions from customers concerning the legal basis for their data transfers.

4. Consider alternative data transfer mechanisms. Companies should begin to consider alternative data transfer solutions. Other data transfer mechanisms, such as standard contractual clauses, binding corporate rules (BCRs), ad-hoc contracts, and derogations such as consent, are available as legal alternatives to Safe Harbor. Which mechanism to choose depends on a company's specific business model, corporate structure, and operations in the EU.

The Commission's Press Statement

Following the CJEU decision, the European Commission held a press conference and announced that it will work with DPAs to issue guidance regarding data transfers to the U.S. to reduce uncertainty created by the fragmentation of data transfer authority within the EU. The Article 29 Working Party confirmed that it will hold an extraordinary meeting on this topic later in the week. The commission also emphasized that other data transfer mechanisms remain available. Finally, the commission underscored the need to reach an agreement on a new Safe Harbor framework. Any new Safe Harbor agreement will need to meet the criteria set forth by the CJEU in today's judgment.

Conclusion

The invalidation of the Safe Harbor framework fundamentally affects the ability of companies to transfer personal data outside of the EU, and creates significant legal uncertainty for business. This is another demonstration of the CJEU's strict interpretation of EU data protection law and of the business impact of EU data protection law. The strong affirmation of the DPAs' independence despite an EU adequacy finding is likely to lead to fragmentation in the EU in how international data transfers are handled. Companies should begin to consider alternative legal mechanisms to secure their international data transfers.

We are monitoring the consequences of this case and the EU-U.S. negotiations closely, and will update you on any new developments. On October 15 at 9:30 a.m. PT, WSGR's team of EU privacy experts will host a webinar on the CJEU Schrems decision and its impact on companies doing business in the EU. Please click here to register.

 

1 See the CJEU Judgment, delivered on October 6, 2015, in Case C-362/14 Maximillian Schrems v. Data Protection Commissioner (request for a preliminary ruling from the High Court (Ireland)), available at http://curia.europa.eu/juris/document/document_print.jsf?doclang=EN&text=&pageIndex=1&part=1&mode=req&docid=169195&occ=first&dir=&cid=111628.

2 Commission Decision of July 26, 2000, pursuant to Directive 95/46/EC of the European Parliament and of the Council on the adequacy of the protection provided by the Safe Harbor privacy principles and related frequently asked questions issued by the U.S. Department of Commerce (notified under document number C(2000) 2441).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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