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January 26, 2016 Articles

The U.S.–EU Privacy Safe Harbor Is Invalid

What can companies do now to avoid its enforcement, what regulatory framework will replace it, and how can clients prepare?

by Thomas Carey

The flow of data between the European Union (EU) and the United States is enormous. Much of it relates to individuals and their activities. For example, credit card use, Internet searches, Facebook entries, and software license registrations all create data that is tied to an individual, and that data has in the past traveled relatively freely between U.S. and EU businesses. A recent court decision may be about to change all that.

Transferring Data Between the European Union and United States
The right to privacy is explicitly recognized in the European Union by virtue of the European Convention on Human Rights. The European Union has taken this issue quite seriously, forbidding by Directive 95/46 the transfer of data about EU individuals to countries that do not ensure an adequate level of protection of that data. While some non-EU countries have been designated as having an adequate level of protection, the United States has not.

Historically, there have been two ways for EU companies to transfer data to entities in countries that have inadequate privacy protections. One is to enter into contracts containing the exact terms spelled out in so-called "Model Clauses" promulgated by the EU Commission. The other method is available to transfers between corporate affiliates and involves binding corporate resolutions (BCRs). In addition, a foreign company can collect data directly from the individual(s) concerned with the consent of that individual.

In 2000, the United States and the European Union adopted a third way to permit data transfers to U.S. entities: the U.S.–EU Safe Harbor Framework. This arrangement was negotiated by the U.S. Commerce Department and the European Commission. Under that framework, a U.S. company could certify its adherence to certain basic principles of EU privacy laws, designate a privacy officer to receive inquiries or complaints from EU citizens, and appoint a third party to hear privacy complaints of EU citizens who were not satisfied with the response from that privacy officer. Having taken those steps, the company could then register on a list maintained by the U.S. Commerce Department. This procedure has been adopted by over 4,500 U.S. companies.

In negotiating the Safe Harbor Framework, the United States insisted that the safeguards of the program be subject to an override in favor of investigations for purposes of law enforcement and national security.

European Union Litigation Challenging the Safe Harbor Framework
In the fall of 2011, a Facebook privacy lawyer addressed a class at the Santa Clara Law School. Max Schrems, an Austrian law student who was in the class, was surprised to see how badly Facebook underestimated the stringency of EU privacy law.

When he returned to Austria, Schrems requested a copy of the data that Facebook maintained about him. To his surprise, he received a CD with 1,200 pages of data. Stunned by the amount of information that had been collected, he unleashed a series of legal challenges to Facebook's handling of personal information about European citizens.

In 2013, German and Irish privacy authorities pressed Facebook to delete its facial recognition technology from the European version of Facebook. Facebook uses that technology to suggest pictures that Facebook believes to be friends of users, and encourages them to "tag" the photos, confirming the identities of their subjects. (The feature was temporarily suspended in the United States but was reactivated.) According to Schrems, Facebook continues to store these photos and tags even if the users ask that they be deleted.

In May 2013, Edward Snowden made his disclosures about the PRISM program under which the National Security Administration (NSA) obtained unrestricted access to mass data stored on servers owned or controlled by Google, Yahoo!, and other Internet companies. He also disclosed other NSA programs under which millions of emails, contact lists, and text messages were "harvested." According to the Guardian newspaper, Facebook was forwarding its European user data en masseto the NSA under the PRISM program. Facebook could nonetheless rely on the Safe Harbor Framework because of the language that permits national security matters to trump privacy concerns. The collection of information did not stop at the U.S. borders. It included the telephone conversations of 35 world leaders including German leader Angela Merkel.

The Snowden revelations provided rocket fuel for Schrems's legal efforts. In 2013, he filed complaints against Facebook and Apple in Ireland, Facebook in Austria, Skype and Microsoft in Luxembourg, and Yahoo! in Germany. Schrems pointed out that EU law requires that disclosures of personal information to government agencies be for a specific investigative purpose and that the turnover of data be proportionate to the purpose at hand. In his view, a mass turnover of data under the PRISM program was neither for a specific purpose nor proportionate to any purpose that might be enunciated.

The Irish Data Protection Commissioner (DPC) dismissed Schrems's challenge because, he concluded, Facebook's activities were protected by the Safe Harbor Framework. In the DPC's view, once the European Union had blessed the process of that framework, he was powerless to investigate whether companies that had registered under the framework were in compliance with EU privacy law.

Schrems appealed the adverse ruling of the DPC to the Irish High Court. On September 23, 2015, the Irish Advocate General issued an opinion stating that the PRISM program jeopardizes the privacy of European citizens unreasonably and gives them no recourse by which they might challenge the accuracy of the information held. (Such a remedy is available only to U.S. citizens and permanent residents under the Privacy Act of 1974.) On that basis, he expressed the opinion that the Safe Harbor Framework, which implicitly permits the mass turnover of personal information to the NSA, is invalid.

As a result of this opinion, the Irish High Court referred the matter to the Court of Justice of the European Union (CJEU) for guidance as to whether the DPC had the authority to investigate the adequacy of the protection of EU citizens' privacy under the Safe Harbor Framework.

The CJEU Invalidates the Safe Harbor Framework
The CJEU issued a stunning opinion on October 6, 2015. The first part of the opinion dealt with subtleties concerning the sharing of power and authority within the European Union. The CJEU reserved to itself the sole power to invalidate a directive of the Commission, but it held that supervisory authorities of European countries, such as the DPC, have the power to investigate whether transfers of personal information to a country outside of the European Union comply with European legislation.

The CJEU did not stop there. It went on to assess the validity of the Safe Harbor Framework and found several flaws. As a procedural matter, it criticized the Commission for having adopted the Safe Harbor Framework without sufficiently examining the protection of privacy available in the United States. The CJEU noted that the Safe Harbor Framework applies only to the companies that adopt it, not to the United States government itself. It then noted that EU law is not satisfied when personal information is transferred en masse to U.S. legal authorities.

In its press release of October 6, 2015, announcing the Schrems decision, the CJEU

observe[d] that 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, compromises the essence of the fundamental right to effective judicial protection, the existence of such a possibility being inherent in the existence of the rule of law.

Finally, the CJEU criticized the Safe Harbor Framework for purporting to deny the national supervisory authorities the power to investigate an individual company's privacy protection if that company was a Safe Harbor Framework participant.

For these reasons, the CJEU ruled the Safe Harbor Framework to be invalid. As a result, the matter was remanded to the Irish High Court, which has directed the DPC to investigate Facebook's activities for their compliance with EU privacy laws. Seeking shelter from the storm caused by the CJEU ruling, Facebook adopted the Model Clauses in November 2015.

Fallout from the CJEU Decision
The data protection authority (DPA) of the German state of Schleswig-Holstein stated on October 14, 2015, that the Model Clauses can no longer support the transfer of data to the United States; that individual consent no longer works to support data transfers to the United States; and that no resolution of this impasse is likely unless there is a comprehensive change in U.S. law. It all but forbade any further transfers of personal data from that state to the United States.

Countries not in the European Union but wishing to maintain their good standing with the European Union, such as Israel, have also backed away from unfettered data transfers to the United States. Meanwhile, the Information Commissioner's Office in the United Kingdom has cautioned against alarm, pointed to the continuing availability of the Model Clauses, and suggested that any enforcement against data transfers to the United States will be slow in coming. In a word, the advice coming from the European Union is fragmented.

One reason that this fragmentation persists is that the Safe Harbor Framework arose from a directive, which directs EU countries to adopt laws to carry out its principles but leaves each country at liberty to do so according to its own preferences. Thus, for example, a company wishing to utilize the Model Clauses might be free to do so without notice or approval in one EU country, might need to notify the DPA in another, and might need the approval of the DPA in a third EU country.

Efforts to Find a Solution
The business communities of the European Union and the United States are alarmed about the lack of any clear path to continuing existing data flows in compliance with EU law. There are several efforts underway to resolve the problem.

One step is a possible change in U.S. law that would give EU citizens a right to examine the information that the U.S. government has collected about them and to require that errors in the data be corrected. This bill, the Judicial Redress Act of 2015, was passed by the U.S. House of Representatives and is now under consideration by the Senate Judiciary Committee.

Another effort underway is the current negotiation between the European Union and the United States to develop "Safe Harbor 2.0." The European Union has established a grace period that will expire on January 31, 2016, so there is not much time to get this accomplished. And in light of the sentiment coming out of Germany, which wants genuine protection from U.S. mass data collection and surveillance, it is not at all clear that the bureaucracies of the United States and the European Union will be able to reach an accord that satisfies the CJEU or several of the DPAs. It will take considerable U.S. legislation to accomplish that end, and in light of recent terrorist activity, it is hard to imagine the surveillance powers of the NSA being curtailed.

The other effort is the European work on a General Data Protection Regulation. This regulation has been under development for some time, but the Schrems decision seems to have given the European Commission a special incentive to complete its work and present it to EU Council of Ministers for adoption.

While this regulation is likely to be stringent, it will (if enacted) be a single, EU-wide standard that will end the fragmented nature of current EU privacy regulation. Then at least there will be a target for the United States to aim at if it wants to continue the current massive data flows between the United States and the European Union. That's the upside. The downside is that the penalties associated with violations of the proposed regulation will be severe. Thus, the United States and the European Union will have to come to grips with their differing views on surveillance, or else the economies of the United States and the European Union will become less connected.

The interim solution may be for U.S. companies to utilize servers located in the European Union for the storage of all personal information about EU citizens. It is not clear that this solution will protect that data from the prying eyes of the NSA, because the Foreign Intelligence Surveillance Act (FISA) permits spying on foreign persons, subject to modest oversight by the FISA courts. Nonetheless, this solution should help to protect the companies from EU privacy enforcers, particularly if the records in the European Union are not subject to subpoena by the NSA or the FBI and are not accessed from the United States.

Meanwhile, US-based companies with operations in Europe can be caught in the middle as the US and the EU fight over privacy rights.  Microsoft is in such a bind right now.  In connection with a criminal investigation, the US Department of Justice has served it with a warrant demanding that it turn over e-mails of a customer whose emails are stored on Microsoft servers in Ireland.  Microsoft may have a choice of violating US law by refusing to turn over the emails or violating EU law by turning them over. 

The district court ruled in favor of the Department of Justice.  The case is now on appeal to the Second Circuit Court of Appeals.  If that ruling is upheld, it will be viewed as further evidence that the US cannot be trusted to ensure privacy of EU citizens, even though there is scant evidence that the subject of the investigation is an EU resident.  (Microsoft determines where to store the data entirely upon the user's own statement as to where he or she resides.)  This case is also of little direct relevance to the Safe Harbor Framework because it involves data located in the EU, not data that has been transmitted to the US.  However, it is viewed as symbolizing the ability of US law enforcement officials to gather private information without adhering to the formalities that would otherwise apply in the EU.

These developments may seem like distant rumblings to many in the United States. However, this problem presents great difficulties for companies such as Facebook, Google, and Amazon that do business globally and have millions of retail customers. It similarly presents a problem for backend service providers, payment processors, and ad servers. Ultimately it may affect every U.S. website or cell phone app that directs its sales activity to EU countries.

The EU privacy laws also have indirect effects on U.S. companies. For example, the greater transparency that prevails in the European Union has resulted in substantial disclosure of the record-keeping practices of Facebook. Schrems has published a list of nearly 100 data categories that Facebook maintains. The publication of this extensive data collection system may ultimately get Facebook in trouble with the FTC, which keeps a sharp lookout for discrepancies between what companies say that they do in their privacy policies and what they actually do. While this is Facebook's problem today, it could be the problem of numerous other companies tomorrow.

The world is shrinking fast. The Internet requires uniform legal processes in order to operate efficiently, but those processes are in danger of becoming more fractured, not more consistent. Optimists expect a resolution in a few months' time. Others suspect that fundamental discrepancies between the policies of the United States and those of Europe will prevent a tidy solution, and that U.S. and EU companies will struggle for some time to find a way to share data in a manner that promotes efficiency and protects privacy to the degree that Europe requires.

Meanwhile, companies doing business with or in the European Union should carefully map out their strategy for complying with the EU privacy laws, to the extent possible, in order to maintain and strengthen their ties to the EU market. Those that do not may find themselves the subject of investigations and fines by a bewildering array of DPAs, each with its own regulations, requirements, and enforcement processes.

Keywords: litigation, commercial, business, privacy, Internet, European Union, Schrems, data, safe harbor, framework

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