On October 6, the European Court of Justice ruled that Decision 2000/520 of the European Commission, which stated that Safe Harbor-certified US companies provide adequate protection for personal data transferred to them from outside of the EU (the Safe Harbor Adequacy Decision), is invalid (Case C-362/14 – Maximillian Schrems v [Irish] Data Protection Commissioner). The judgment is immediately effective without a grace period. The Data Protection Authorities of the EU Member States (Article 29 Working Party) have already scheduled a working group emergency meeting to discuss the consequences of the judgment, but it is unlikely that the meeting will lead to a simple solution for the 4,000+ US companies who rely on Safe Harbor. The European Commission has also published a press release with a short set of guidelines.

The Reasoning of the Court

In its judgment of 6 October 2015, the Court stated that

• “legislation permitting the public authorities to have access on a generalized 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”

• “legislation not providing 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.”

However, the Court did not continue with an examination of whether these requirements were met under the Safe Harbor framework in the US. Instead, the Court noted that in an adequacy decision the European Commission:

• “must find, duly stating reasons, that the third country concerned in fact ensures, by reason of its domestic law or its international commitments, a level of protection of fundamental rights essentially equivalent to that guaranteed by EU legal order, a level that is apparent in particular from the preceding paragraphs of the present judgment.”

Based on this consideration, the Court found that the Safe Harbor Adequacy Decision “did not state” that the US in fact ensures an adequate level of protection by reason of its domestic law or its international commitments. Furthermore, the Court found that Article 3 of the Safe Harbor Adequacy Decision, which laid down specific rules regarding the powers available to the national supervisory authorities in the light of a Commission finding relating to an adequate level of protection, is invalid because by stating this, the European Commission has exceeded its powers conferred upon it. The Article 3 in question permitted competent authorities in the Member States to suspend transfers to US Safe Harbor certified entities only on limited grounds e.g. if such entities were determined by the FTC to be in breach of the principles or if there was substantial likelihood of the principles being violated, or if the continuing transfer created an imminent risk of harm to individuals. Based on this reasoning, the Court judged the entire Safe Harbor Adequacy Decision to be invalid because it was inseparable from the other Articles.

In essence, the Court did not decide whether or not the Safe Harbor framework failed to provide adequate protection. It instead declared Safe Harbor Adequacy Decision invalid on the basis of technical legal arguments, i.e. because the Safe Harbor Adequacy Decision did not duly set out the reasoning applied to the case and because by deciding to deny the national supervisory authorities of certain of its powers, as set out Article 3 of such Decision, the European Commission exceeded its powers.

Initial Thoughts on Next Steps

Companies who were in some way relying on the Safe Harbor Framework to transfer personal data to the US, will take different approaches depending on their individual appetite for risk in filling the legal gap created by the Court’s judgment.

1. Some companies may elect to continue to rely on Safe Harbor and hope that the ongoing discussions to revise the Safe Harbor Framework will provide a solution soon. Surprisingly, such an approach is not patently illegal, taking into account the Court’s considerations in the judgment. The Safe Harbor Adequacy Decision provided legal certainty until it was declared invalid by the Court, but the principal rule remains. If Safe Harbor ensures an adequate level of protection, Article 25 (1) of Directive 95/46 does not technically restrict the transfer, in theory enabling each party transferring personal data to make its own assessment. Most European data protection authorities, other than the authorities from, for example, the UK and Germany, have not generally allowed data controllers to make such a self-assessment and refused to approve such transfers, where approval is required. For existing registrations based on Safe Harbor, however, the data protection authorities would have to take the first step. There are considerable doubts whether such an assessment would rightly lead to the conclusion that Safe Harbor in fact provides adequate protection, but this remains an open legal question not answered by the judgment. The US Government strongly objects to the notion that it engages in indiscriminate surveillance of anyone. It will come down to data protection authorities or individuals to take legal action in the EU to challenge those arguments.

Since 2013, the European Commission has been conducting negotiations with the US authorities to tighten the original Safe Harbor Framework. In recent years there has been considerable progress and it is certainly possible that there will be pressure to expedite a resolution following today’s decision. On the other hand, today’s Court decision may complicate and delay a final resolution, as individual Member State data protection authorities may now wish to apply new pressure on the European Commission to push for a “more strict position” in these negotiations. For these reasons, together with the potential sanctions against illegal data transfer to the US by individual data protection authorities, continuing to rely on Safe Harbor would appear to be the riskiest approach.

2. Other companies already have or will move to put in place Model Contracts. These are agreements between the relevant European data exporter and the data importer of personal data and are approved by the European Commission as providing adequate safeguard to data transfers. These Model Contracts do not work in all circumstances, but can often provide a good substitute for reliance on a Safe Harbor certification, particularly in intra-group set-ups. However, in the long run, relying on Model Contracts may not be a stable solution either as the European Commission’s decisions on the adequacy of Model Contracts could easily be challenged on the same basis as Safe Harbor, i.e., that fundamental rights of data subjects are not adequately protected in the form clauses, which do not address rights or remedies relating to the controversial US government surveillance activities. That said, procedurally, the Decisions can only be recalled by the European Commission itself or they can be invalidated by the European Court of Justice, so as long as the Decisions are in place, companies can rely on them.

In its judgment, the Court makes it clear that data protection authorities have the obligation to examine whether such decisions on the adequacy of Model Contracts are valid, but they will not have the power to declare them invalid. Therefore, data protection authorities must seek court proceedings to initiate a preliminary ruling from the Court in order to have such a decision invalidated. For the decisions on Model Contracts, this will take time. Therefore, putting in place Model Contracts between the relevant exporting and importing entities presents a valid interim choice as a legal matter.

3. Binding Corporate Rules of course provide another method of transfer. Groups who have approved Binding Corporate Rules in place have a considerable advantage now. The process for implementing Binding Corporate Rules is not a simple one – it involves agreeing a binding group-wide set of rules that can cover data controller to data controller and/or data controller to data processor transfers, which are then approved by one lead EU data protection authority with the assistance and oversight of two others. Given the level of approval and oversight needed by regulators, as well as the internal work required to put in place a coherent set of rules, this is not a quick fix. There are significant backlogs with some data protection authorities and at best the process seeking regulation will take 12 months (but in reality may take much longer).

4. Alternatively, some companies may look into derogations from adequacy requirements. Article 26 (1) of Directive 95/46 provides a number of such derogations:

“(a)   the data subject has given his consent unambiguously to the proposed transfer; or

(b)     the transfer is necessary for the performance of a contract between the data subject and the controller or the implementation of pre-contractual measures taken in response to the data subject’s request; or

(c)     the transfer is necessary for the conclusion or performance of a contract concluded in the interest of the data subject between the controller and a third party; or

(d)     the transfer is necessary or legally required on important public interest grounds, or for the establishment, exercise or defence of legal claims; or

(e)     the transfer is necessary in order to protect the vital interests of the data subject; or

(f)     the transfer is made from a register which according to laws or regulations is intended to provide information to the public and which is open to consultation either by the public in general or by any person who can demonstrate legitimate interest, to the extent that the conditions laid down in law for consultation are fulfilled in the particular case.”

These derogations need careful considerations and will not work in many cases, but can be a good source for solutions, depending upon the business model.

Some Practical Considerations

Intra-group Transfers: Model Contracts are easy to implement (at least in theory) in intra-group scenarios, although we note of course that many countries still require notification to the data protection authorities of any transfers relying on this approach, and in some countries, prior approval is even required. Furthermore, working out which personal data a particular business unit processes and identifying the proper entities and contracts executed can take time. Companies must also work out who is a data controller and data processor for each type of data so that the pertinent parts of the organization sign up to the correct mandatory sets of Model Contracts. In large organisations in particular, the effort required to undertake and complete a complete and accurate internal and vendor data-governance exercise was a practical reason so many organisations opted instead for the Safe Harbor approach.

Problematic restrictions on Sub-processors:Where data was transferred to Safe Harbor certified data processors (e.g. vendors and service providers), an agreement using the 2010 data controller to data processor Model Contract is a good immediate solution provided vendors are prepared to sign them and commit to their terms. In theory this sounds simple enough, but in practice this too may take time. Restrictive sub-processing obligations in the Model Contracts require a data processor to ensure that its sub-processors have signed up to terms identical to the Model Contracts, which in reality often proves difficult. Processors that previously relied on Safe Harbor as a transfer mechanism will no doubt require some time to get their own house in order given the Safe Harbor onward transfers rules were much less prescriptive.

The Article 29 Working Party has been looking at developing stand-alone processor to processor Model Contracts. Although this is a process worth monitoring, these form agreements may also, ultimately, include prescriptive obligations on appointment of further sub-processors.

US Online Businesses: Another business model where Model Contracts do not provide a complete solution is that of US online businesses that have no EU presence (i.e., offices, data centers, and/or personnel). Absent incorporating an EU entity and changing the business model to ensure that the EU company itself controls all data collected from EU customers, Model Contracts would only work if put in place with all their users (via active contract-based acceptance of website terms and conditions). Whilst these online businesses may previously have argued that EU data protection law does not apply to them at all, they are unlikely to succeed based on current guidance (which is confirmed in the position in the new General Data Protection Regulation).

Properly soliciting and documenting affirmative consent will be a data transfer option for some US online businesses. Where a US online business contracts with its end users, it can rely on the exemption that the transfer “is necessary for the performance of a contract”, but that would not cover onward transfers to service providers. If companies do want to rely on consent, they should ensure that there is a clear and prominent (opt-in) consent that is individually accepted by a positive (documented) act, such as ticking to accept terms or clicking to submit information or receive a service.

Businesses that operate a branch structure: Some organizations operate via a branch structure (where essentially the EU branch and US company are part of the same legal entity or vice versa), and, in such a case, there is no legally distinct data exporter and data importer. One solution would be for the data controller to unilaterally commit to the obligations of both the importer and the exporter position under the Model Contracts, in a manner that gives the individuals enforceable rights. Whilst in theory this should provide the same contractual protection as Model Contracts, there is some risk in adopting this structure ahead of any clear guidance.

Ensuring actual (rather than paper compliance): Finally, Model Contracts do require signatories to actually understand and comply with the stated terms. Organizations need to review them and ensure that their operational processes and procedures will ensure compliance or whether any changes will be needed.

Conclusion

The reasoning of the judgment is not as radical as the Opinion of the Advocate General which implied that the principles of the Safe Harbor Framework itself were insufficient to provide adequate protection, and the existing law does provide for alternative solutions, which should be relied on instead of Safe Harbor. However, one should keep in mind that the Safe Harbor Framework is mainly a EU-US solution. It was a helpful solution to address adequacy, but experience with other countries shows that international trade can easily survive without a dedicated Safe Harbor Framework. At the European Commission’s press conference earlier today, it was clear that the data protection authorities and the Commission will be meeting to discuss enforcement. Whilst we cannot at this early stage predict the future, we recommend organisations to at least start examining the extent to which they have relied on Safe Harbor, what alternatives are available in light of their corporate structure and business operations, and how to implement them in order to ensure they are perceived as addressing the issues by data protection authorities, and should they decide to enforce sooner rather than later mitigate the risk of orders prohibiting transfer and/or and fines for continuing to rely on Safe Harbor.

We will continue to update this blog as data protection authorities and other important stakeholders react to this important decision.