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The EU Reveres Data Privacy, the US Puts National Security First, and US Businesses are Caught in the Middle

Thomas C. Carey

Thomas C. Carey | Partner, Business Chair View more articles

Thomas is a member of our Business Practice Group

Imagine that you run a small software company that has developed point-of-sale software for amusement parks, zoos and other entertainment venues. You’re based in North Carolina with no overseas offices. If you think you need have no concern about European privacy law, you’d be wrong. That company, CenterEdge Software, is one of more than 4,500 US companies that have registered for the protection afforded by the US-EU Safe Harbor Program.

CenterEdge’s software is in use in Europe, it is used to collect information about individuals and the company’s exposure to EU law is significant. Similarly, many other US-based companies, such as cellphone app developers and websites that sell to EU customers, need to be aware of developments in EU privacy laws.

The right to privacy is explicitly recognized in the EU by virtue of the European Convention on Human Rights. The EU restricts the transfer of data about EU individuals to countries that do not ensure an adequate level of protection of that data. While a few non-EU countries have been designated as having an adequate level of protection, the United States has not.

This affects US companies that have operations in Europe or that process data about individual residents of the EU on behalf of European customers. For example, credit card processors, software companies, relocation companies, advertisers, financial institutions and service companies have all had to pay attention to EU data privacy regulations. Soon, the EU law will apply to anyone who directs sales activity to EU residents whether they have a presence in Europe or not.

There are ways for EU companies to transfer data to entities in countries like the United States that are deemed to have inadequate privacy protections. For example, the EU company can enter into contracts having the exact terms spelled out in so-called “Model Clauses” promulgated by the EU Commission. Another method is available for transfers between corporate affiliates if they enter into binding corporate resolutions. Another method involves obtaining the “unambiguous consent” of the individuals involved.

The US-EU Safe Harbor Framework

Construction. In 2000, the US and the EU adopted another way to permit data transfers to US entities: the US-EU Safe Harbor Framework. This arrangement was negotiated by the United States Commerce Department and the European Commission. Under that framework, a US 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 are not satisfied with the response from that privacy officer. Having taken those steps, the company could then be registered on a list maintained by the US Commerce Department. This procedure has been adopted by over 4,500 US companies.

In negotiating the Safe Harbor Framework, the US insisted that the safeguards of the program be subject to an override in favor of investigations for purposes of law enforcement and national security. This US policy choice eventually led to the unraveling of the EU-US Safe Harbor.

Deconstruction. The first loose thread appeared in the fall of 2011, when 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, Mr. 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.

Probably as a result of those initial challenges, in 2013 Facebook was pressured by German and Irish privacy authorities 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 identity of their subjects. (The feature was temporarily suspended in the U.S. but was re-activated.) According to Mr. 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.”

The collection of information did not stop at the US borders. It included the telephone conversations of 35 world leaders, including Angela Merkel. According to the Guardian newspaper, Facebook was forwarding its European user data en masse to 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 Snowden revelations provided rocket fuel for Max 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. The most important challenge, at least from the perspective of Americans, is the one brought in Ireland, where Facebook maintains its EU headquarters.

Mr. 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 that purpose. 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.

Mr. Schrems had no luck in dealing with the Irish Data Protection Commissioner (DPC), who felt that Facebook’s activities were protected by the Safe Harbor Framework. Mr. Schrems appealed from 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 unreasonably jeopardizes the privacy of European citizens and gives them no recourse by which they might challenge the accuracy of the information held. (Such a remedy is available only to US citizens and permanent residents under the Privacy Act of 1974). On that basis, he expressed the opinion that the Safe Harbor Framework 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. The CJEU issued a stunning opinion on October 6, 2015, which:

  • Criticized the Commission for having adopted the Safe Harbor Framework without sufficiently examining the protection of privacy available in the US
  • Noted that the Safe Harbor Framework applies only to companies that adopt it, not to the United States government itself
  • Concluded that EU law is not satisfied when personal information is transferred en masse to United States legal authorities
  • Said that, by denying EU citizen the right to review and contest the accuracy of information about them held by US authorities, US law “compromises the … fundamental right to effective judicial protection”. (emphasis in original).

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

Fallout. Fallout from this decision was almost immediate. On October 14, 2015, the data protection authority (DPA) of the German state of Schleswig-Holstein stated that the Model Clauses can no longer support the transfer of data to the US; that individual consent no longer works to support data transfers to the US; and that no resolution of this impasse is likely unless there is a comprehensive change in US law. It all but forbade any further transfers of personal data from that state to the US.

On October 26, 2015, the state and federal DPAs of Germany published a position paper affirming the October 14 statement and saying that, while individual consent may be used as a mechanism for data transfers from Germany to the US, it may not be used if data is transmitted repeatedly, on a large scale or as a routine procedure. The DPAs also said that consent for transfers of employee data will be acceptable only in exceptional cases.

The EU Article 29 Working Party (WP29), a body comprised of all of the data protection authorities in the EU, announced in October 2015 that they would “take all necessary and appropriate actions” to enforce the EU privacy laws with respect to transfers to the U.S. if no appropriate solution was found by the end of January 2016.

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

One reason that this fragmentation persists is that the Safe Harbor Framework arose from a “Directive”, which requires 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.

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 that 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 the 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 based 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.

Reconstruction. The business communities of the EU and the US are alarmed about the lack of any clear path to maintaining existing data flows in compliance with EU law. Several efforts are underway to resolve the problem.

One step is a possible change in US law that would give EU citizens a right to examine the information that the US government has collected about them and to require that errors in the data be corrected. This bill, the Judicial Redress Act of 2015 (“JRA”), was passed by the US House of Representatives. The Senate Judiciary Committee approved the JRA on January 28, 2016 but added an amendment that is not getting good reviews in the EU. The amendment would limit the grant of rights to citizens of countries that permit commercial data transfers to the US, and that do not impede national security interests of the U.S. This amendment has thrown more sand into the gears of a negotiation between US and EU authorities that was already problematic.

The US Commerce Department and the Federal Trade Commission has been negotiating with WP29 to develop “Safe Harbor 2.0.” These intense discussions were operating under a deadline of January 31, 2016, but a deal was announced on February 2, 2016. In the new arrangement, the U.S. agreed not to subject personal information about EU residents to mass surveillance when it is copied to U.S. servers and to appoint an ombudsman to follow up on complaints from Europeans concerning misuse of their personal information. These commitments were supported by a letter from the Office of the Director of National Intelligence and from assurances by Secretary of State John Kerry.

Next Up: The General Data Protection Regulation

Meanwhile, the EU is proposing to supplant the directive on which the Safe Harbor Framework is based with a new General Data Protection Regulation. The terms of the Regulation were announced on December 18, 2015, but its final text is now being translated and is thus not available yet. According to the December 18 announcement, the Regulation will include the “right to be forgotten,”that is, the right to require the removal, without delay, of personal data of a child (defined as under 18 years old) collected or published on a social network.

The Regulation will require that any determination that a non-EU country has adequate legal protections of personal information will have to be reviewed at least every four years. Certain companies will have to appoint a “data protection officer” who will act in part as an independent ombudsman on behalf of individuals who have privacy complaints. The Regulation envisions the development of European data protection seals that certified organizations will be able to offer to non-EU companies if they agree to have their data processing activities audited for compliance with the Regulation.

Data processors and controllers will be required to report any data breach promptly. In order to rely on the consent of an individual to the collection of data about that person, the consent will have to be “unambiguous.” Each company that receives personal data in the EU will be subject to the jurisdiction of a single data protection authority (DPA) and may face penalties of up to €20 million or 4% of their global annual revenue. Most importantly, the Regulation will apply to any company in the world that directs its activities in part towards Europeans as customers and collects or processes information about them.

The Regulation is lengthy and detailed, so companies planning to include Europe in their plans will have to begin addressing the requirements of the Regulation, even though it is not likely to enter into force until the spring of 2018.

Coping With Uncertainty

European authorities indicate that it will take at least three months to transform the deal that was announced on February 2, 2016 into “Safe Harbor 2.0.” In the meantime, it is likely that the deal will be criticized by EU privacy advocates and challenged in court.

So, what to do for the next two years, when the Safe Harbor 2.0 is under attack and the law in the EU is fragmented? First, US companies should monitor the progress of Safe Harbor 2.0 and make sure that their registrations and compliance procedures are up to date. Second, they should study the General Data Regulation and move in the direction of compliance with it. Third, they should consider whether they are doing business in a jurisdiction – such as Spain — that requires registration in order to export personal data from Europe, and monitor the acceptance of Safe Harbor 2.0 in these jurisdictions.

In any event companies should engage in proactive attempts to ensure maximum compliance with basic EU privacy principles. The principles of the Safe Harbor Framework are a good starting point, even though the program has been suspended and its legal underpinnings remain shaky. Those principles require that a company that collects data about EU individuals:

  • Inform individuals about:
    • the purposes for which it collects and uses personal data,
    • the company contact information,
    • the types of third parties it transfers the data to, and
    • what choices the individual has have for limiting uses and disclosures;
  • Give individuals the opportunity to choose how personal information is used and disclosed to third parties;
  • Ensure that the data forwarded to third parties remains protected;
  • Take reasonable steps to prevent loss, misuse or unauthorized disclosures;
  • Collect only data that is relevant for purposes for which it is to be used and take reasonable steps to keep it current;
  • Provide individuals with access to their data and an opportunity to correct or amend inaccurate data; and
  • Provide individuals with a mechanism to resolve privacy disputes.

Safe Harbor 2.0 is at best a temporary and leaky vessel providing passage towards the forthcoming General Data Protection Regulation. While potentially more burdensome, that regulation will offer much greater certainty and uniformity among the EU countries. The time to develop compliance plans targeting that regulation is fast arriving.

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