Safe Harbor – What Happens Now?

Huge uncertainty has been caused by the recent judgment of the Court of Justice of the European Union (CJEU) on 6 October that the Safe Harbor decision by the European Commission is invalid. Many companies which previously relied on the Safe Harbor regime to transfer personal data from the EEA to the U.S. are left wondering what to do. This is not a problem that can be ignored and it is important to be prepared. This article considers the options that businesses may be considering now that safe harbor has gone, and the impact the judgement is having.

What data transfers are caught? 

EU law prohibits the transfer of personal data from the EU unless the receiving country ensures an “adequate” level of protection. EEA countries have also signed up to the EU regime and therefore the recommendations in this note should also be considered in relation to data exports from Iceland, Liechtenstein and Norway. 

The European Commission has declared that certain countries are adequate, such as New Zealand and Canada. They had also decided that, while the U.S. as a whole is not adequate, U.S. companies who had signed up to the Safe Harbor self-certification scheme were. 

A U.S. company may be affected by this decision because:

  • it has an establishment or equipment in the EU from which it exports personal data to the U.S. In the recent Weltimmo case, the CJEU adopted a broad interpretation of what will constitute an “establishment” and found, in the context of an internet business, that it arose where the website was in a local language and where the services were clearly aimed at that Member State; or
  • it provides services to EU-based organisations which involves importing data to the U.S. – those organisations must now find an alternative basis for data transfers to that U.S. service provider. 

Why is the Safe Harbor scheme suddenly invalid? 

The Safe Harbor regime had been receiving criticism for a number of reasons and its continued recognition as ensuring adequacy is currently under discussion between the European Commission and the U.S. government. Negotiations have intensified since the Snowden revelations. The European Commission made 13 recommendations including requirements for transparency and a narrowing of the national security exception. 

In parallel, following a recent request for a preliminary ruling by the Irish High Court to the CJEU in relation to a case brought by Max Schrems against the Data Protection Commissioner in Ireland, the CJEU has, in the present case, declared Safe Harbor invalid. This was predominantly because of the mass, indiscriminate access to data that U.S. authorities have (which is not compatible with EU law) and the inability of individuals to pursue legal remedies. This judgment has also increased uncertainty surrounding Commission decisions of adequacy generally. This is because the key message was that the Commission decision could not prevent a national data protection authority (DPA) from investigating a claim that the relevant country does not ensure an adequate level of protection. 

The Article 29 Working Party (an independent supervisory body composed of representatives from the national DPAs) has released a Statement in response to the CJEU judgment. While not binding, this Statement shows clearly how the DPAs are approaching this issue. They emphasised that the question of mass and indiscriminate surveillance is key. Where the surveillance is incompatible with EU law, in their view existing transfer tools may not be the solution.  Transfers to countries where the powers of state authorities to access information “go beyond what is necessary in a democratic society” will not be considered safe. 

Other countries with similar adequacy tests (eg Israel and Uruguay) mirror or adopt European Commission determinations of adequacy either in legislation or guidance.  These countries will be looking at the CJEU judgment with interest. Switzerland is not in the EU but its regulator (FDPIC) has said already that Safe Harbor is now under review and has encouraged the use of EU servers for Swiss data. 

Does any action need to be taken?  

All companies, particularly exporters of data from the EU, should carry out an internal audit to check on what basis transfers are made to the U.S. (whether directly or indirectly). This will include checking contracts with customers, vendors, and subcontracts. They will also need to check marketing communications, privacy notices, internal policies and staff training to see where change might be required (eg a policy may refer to reliance on Safe Harbor). 

U.S. importers who previously relied on Safe Harbor to receive personal data from the EU are likely to be asked by those which transfer data to them to put in place a new mechanism to make the transfer compatible with EU law. This is likely to be an inconvenience in comparison with the relatively simple and affordable process of self certifying under Safe Harbor.  The burden is on the exporter to find a lawful basis for the transfer, but in practice it will also fall on the importer. 

What options are there now safe harbor has gone? 

Practical steps can be taken to avoid or minimise U.S. transfers or to find another basis on which to make a U.S. transfer. Different approaches will fit different business models. U.S. importers should familiarise themselves with these options and be ready to discuss the alternatives. Note that the options below are not mutually exclusive and it may be necessary in practice to implement several options. 

It is also important to bear in mind that the Article 29 Working Party is currently looking at the options for legitimising transfers. We cannot rule out the possibility that some of these will be challenged on the basis of the same arguments raised in the Schrems case. A number of DPAs are already of the opinion that Model Clauses (see Option 2a below) are not sufficient to legitimise transfers to the U.S.. For example, the Schleswig-Holstein authority in Germany has said that if the findings of the CJEU are strictly applied  to data transfers made on the basis of Model Clauses, such transfers are no longer permissible. 

Option 1: Minimise/Avoid U.S. transfers 

Cross border data flows to the U.S. should be reviewed. Minimise the amount of personal data collected and consider whether the data can be anonymised, pseudonymised or encrypted before it is transferred to the U.S.. These are not necessarily routes around the problem but they are helpful risk mitigation strategies. 

Also consider whether alternative technical solutions could be employed such as moving to servers based in the EU for EU data. If this is commercially undesirable, and for transfers that will still be made to the U.S., an alternative basis for the transfer must be found. 

Option 2: Transfer the data under agreements 

(a) Standard EU Model Clauses 

These are standard agreements provided by the European Commission. Transferring data under these agreements is another way to legitimise the transfer. There are separate Model Clauses - controller to controller (two versions), and controller to processor. A data controller is the person/company who determines the purposes and means of processing – a processor simply processes on their behalf. Many companies have already been using Model Clauses coupled with Safe Harbor certification as a basis for transfers. 

There are advantages and disadvantages with the different forms of Model Clauses and Allen & Overy would be happy to advise on the most suitable option for a particular business. The Model Clauses can be found here.

This option is attractive for exporters from the EU who are used to the EU data protection regime. However, it may present more issues for an importer in the U.S. for example:

  • In order to automatically legitimise the transfer, the clauses must not be amended.  They will increase the overall liability of the importer.
  • Data subjects have a right to take action for breach against the party at fault. While the exporter will always retain responsibility for any harm arising from its initial transfer of the data, this does expose the importer to risks they did not have under the Safe Harbor framework. In some cases there may be joint and several liability.
  • They are not always a quick solution. In some EU countries there are still formalities, which require model clauses to be filed with and/or approved by the competent data protection authority (eg in Luxembourg).
  • They must be kept up to date which may be a burden if the business model requires regular change. 

There is a very real risk that in the current climate data subjects will make a claim under Model Clauses against an exporter or importer who has disclosed a lot of data to U.S. authorities. The Article 29 Working Party Statement recognises this and is analysing the impact of the CJEU judgement on this transfer tool. However, it is clear that, at least for now, Model Clauses are the obvious interim solution. 

If Model Clauses are to be used (or were already in place alongside Safe Harbor), they will need to be backed up by the exporter with a robust system of checking and creating a clear audit trail to demonstrate compliance in the event that they are challenged. This must include tracking requests for access to EU personal data from U.S. authorities received by the importer, and ensuring that the importer is prepared to say “no” where it is not compatible with EU law. This may require a shift in approach. 

(b) Binding Corporate Rules (BCRs)

BCRs are intra-group policies governing the use of personal data within a corporate group; when approved by the relevant data protection authorities they can be used as the basis for intra-group transfers. Organisations relying on BCRs must demonstrate that their BCRs ensure adequate safeguards for protection of personal data throughout the organisation. They will be more suitable for larger organisations. 

While this is a useful mechanism (and a very effective tool for raising privacy awareness internally), BCRs do take some time to receive approval (on average about 12-18 months) and will not therefore provide an immediate solution. However, in the longer term they are an extremely useful compliance tool for larger organisations. The cost of BCRs can be limited by use of in-house lawyers but it is still a labour-intensive process by comparison to Model Clauses. 

Following the CJEU judgement, BCRs may also be vulnerable to challenge. If used, like Model Clauses they would need to be backed up by training and audits to ensure they work in practice. 

Option 3: Rely on consent? 

Given the fact that Model Clauses and BCRs are under review, a consideration of other options is helpful. The EU Data Protection Directive does permit transfers to be made where you have the individual’s consent. This may work in some cases but is often not commercially feasible. The individual must know and understand what they are agreeing to and this means providing more information about the risks of transferring to the U.S.. To be valid, consent must be freely given, specific and informed and the data subject should be able to withdraw consent. The proposed EU General Data Protection Regulation (which looks likely to be agreed in 2016) may also add that it must be explicit.  Consent may be harder to rely on, for example, in the employment context where the parties do not have equal bargaining powers, or where sensitive data is involved. In addition, some data protection authorities, such as the CNIL in France, actively discourage reliance on consent. 

Option 4: Anything else? 

The Directive contains “derogations” which are basically exemptions. Consent is one, but there are others. However, care should be taken as these are fact-dependent, DPAs generally take a fairly narrow view of how they can apply and DPA views differ (so what is acceptable in the Netherlands may be challenged in France).  While these may be attractive to U.S. data importers, it would be necessary to persuade the exporters to rely on them. 

One key “derogation” covers transfers that are necessary to perform certain types of contract (or to set up a contract) and this is useful for data importers. Deciding whether this applies depends on the nature of the goods or services provided under the contract rather than how your business is organised. In certain circumstances this could be a very useful alternative (or supplement) to Model Clauses, BCRs or consent. There are other “derogations” as well which may apply in exceptional (e.g. life or death) circumstances. 

No need to rush? 

Exporting SMEs will need to take steps to audit and move to compliance in an orderly fashion. The Article 29 Working Party suggests that businesses should reflect on the risks taken when transferring data and should consider putting in place any legal and technical solutions “in a timely manner” to mitigate those risks and respect EU data protection laws. The obvious solution, at least for the time being, is to implement Model Clauses but, as we have seen, these are under review so other derogations should also be considered. 

It should not be forgotten that everyone is in the same position. The companies most at risk will be those who allow mass and indiscriminate access by authorities to a range of information about data subjects. While DPAs are apparently ready to enforce from the end of January 2016, it is hard to see that DPAs will target companies that transfer more anodyne information (such as customer lists), and that have in place Model Clauses, good Fair Processing Notices, and importantly that are careful about what data is provided to U.S. authorities. 

U.S. importers should expect to be contacted in the near future by their customers to agree a new way forward. They should be clear on what they are comfortable with accepting (eg if they are asked to put in place Model Clauses). 

Companies should take this seriously - data protection is now a key business risk. 

What impact does the judgment have on the Safe Harbor v.2 negotiations? 

The importance of trade between the EEA and the US and the volume of data transferred mean that the Safe Harbor negotiations for a revised framework will continue. The Commission has confirmed this and is fully committed to transatlantic data flows. Hopefully negotiations will be expedited and will take into account the criticisms made by the CJEU of the original framework. This is particularly likely following the Article 29 Working Party Statement which urgently calls for the Member States and EU institutions to find the political, legal and technical solutions with the U.S. to enable transfers that respect fundamental rights. They have given a deadline of the end of January, after which time EU DPAs are committed to taking appropriate action, including coordinated enforcement. Notwithstanding this urgency, any new Safe Harbor arrangement will remain vulnerable to challenge. The CJEU has made it clear that it is the ultimate arbiter of adequacy.

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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