European Commission Defends Model Contracts

by Latham & Watkins LLP

On November 6, the European Commission issued a comprehensive Communication on the consequences of the Schrems Judgment of the Court of Justice of the European Union (ECJ). In the Communication, the Commission puts national data protection authorities in their place by stating that Model Contracts are a valid alternative measure to provide adequate safeguards for data transfers to the US. According to the Commission, even in countries where use of the Model Contracts require permission by national data protection authorities, such permission has to be granted if the Model Contracts are used without modifications. Only the ECJ would have the power to invalidate the Commission Decisions on Model Contracts. According to the Schrems Judgement, the rights of the data protection authorities with respect to such Decisions are limited to examining them and bringing proceedings against them in court, if the authority believes adequate protection has not been provided.

On October 16, the data protection authorities as organized in the so-called Article 29 Working Party claimed in a Statement that they will continue their analysis on the impact of the Schrems Judgment on other transfer tools. Prior to that Statement, some regional data protection authorities had gone further and claimed that current reliance upon Model Contracts as an alternative transfer mechanism could be inadmissible after the Schrems Judgment (notably the data protection authority of Schleswig-Holstein and Rheinland-Pfalz in Germany). A joint Statement of the German data protection authorities followed and caused further confusion. It stated that the data protection authorities will not give permission to data transfers based on data export contracts. However, the Statement only referred to individually drafted data export contracts which are rarely used in practice anyway. One has to keep in mind that in Germany the use of Model Contracts does not need permission by data protection authorities in any event.

The Communication of the European Commission is fully in line with the Schrems Judgement and provides helpful guidance, albeit with several caveats. First, one cannot rule out one or more data protection authorities taking a stricter view or questioning whether data importers in fact comply with the obligations under the Model Contracts. Second, the European Commission does not go so far as to argue or state that if properly presented in a case before the ECJ, Model Contracts mechanism for transfers to the US would fare any better than the Safe Harbor Framework in Schrems. However, for the time being Model Contracts seem to provide the most reliable alternative to Safe Harbor and from our vantage point, many of the companies listed in the Safe Harbor program are already in the process of moving towards putting standard clauses in place where legally feasible.

Given the Communication of the European Commission, waiting for Safe Harbor 2.0 seems the riskier approach. The Commission already states that they expect negotiations to continue for another three months. The Article 29 Working Group stated that they want to start enforcement actions against companies relying on Safe Harbor by the end of January 2016 (i.e. more than one month before the Commission expects an agreement). Furthermore, notwithstanding (unsurprising) positive statements from stakeholders inside the Safe Harbor 2.0 process, achieving agreement on Safe Harbor 2.0 acceptable within the Schrems Judgment has root challenges. The ECJ states that

(i) “legislation permitting the public authorities to have access on a generalised basis to the content of electronic communications must be regarded as compromising the essence of the fundamental right to respect for private life as guaranteed by Article 7 of the Charter;” and

(ii) “legislation not providing for any possibility for an individual to pursue legal remedies in order to have access to personal data relating to him, or to obtain the rectification or erasure of such data, does not respect the essence of the fundamental right to effective judicial protection, as enshrined in Article 47 of the Charter.”

Complying with these requirements exceeds any concessions the US government would be likely to make, where national security is at issue. Interestingly, the Communication of the European Commission states that the ECJ asked for effective “legal” protection whilst the wording of the Schrems Judgment actually requires effective “judicial” protection. This might be a first sign as to the level of compromise the European Commission is prepared to make.

Against these challenges, the Communication of the European Commission at least provides interim reassurance that sufficient alternatives are in place, perhaps removing some pressure to resolve Safe Harbor 2.0 in a way that can be squared with the Schrems Judgment.

As a consequence, we foresee continued migration from Safe Harbor to Model Contracts in order to mitigate risk of sanctions or inquiries from data protection authorities during any gap period. Having made the transition to Model Contracts, query whether returning to a Safe Harbor Framework mechanism holds appeal, even if the EU and the US agree on Safe Harbor 2.0 at some stage next year.

If, down the road, a case such as Schrems, but this time attacking Model Contracts, reaches the ECJ any lack of judicial redress for secret national security surveillance programs may cause another round of disruption. In short, absent major changes to US laws around surveillance and privacy to bring them into closer alignment with EU data protection expectations, the transfer of personal data from the European Economic Area to the US or other third countries will probably remain to be an ongoing struggle.

It should be also noted that the European Commission announced in the Communication its plan to review the existing Adequacy Decisions with respect to the other 10 countries who received them since the European Data Protection Directive came in force. They are not based on Safe Harbor type of concepts, but they have to be revisited in the light of the requirements set out in the Schrems Judgment. The Commission only notes that limitations on rights of data protection authorities as criticized by the EJC would need to be eliminated in the other Adequacy Decisions. However, the test with respect to the limitations of public authority access and effective judicial protection will have to be applied as well. One cannot exclude the possibility that some of the countries with existing Adequacy Decisions will fail this test, because providing wide-ranging rights for law enforcement without effective judicial protection is not an issue exclusive to the US.

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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