EU Court of Justice invalidates Safe Harbour and the game for thousands US businesses suddenly changes

A hearing at the European Court of Justice (European Court of Justice, 2010)

In what some American media already call a “dramatic judgement”, the European Court of Justice last week changed the course of history for data protection and handling between the EU and the United States. After having declared the “Safe Harbour” data transfer agreement invalid earlier last week, on October 06, the EU’s highest court last Friday urged the EU and the United to shape a new trans-Atlantic data-transfer deal.

A paper monster

The ruling took immediate effect, and surely opened a big hole in the EU-US business legislation and data protection environments. The decision by the European Court of Justice junked a 15-years-old regulation and indeed left some 4,500 US companies, which have previously relied on Safe Harbour, linger in a potential bureaucratic nightmare. To understand why, it is necessary to take a step back and review some data privacy history.

Background

Since 2000, thousands of US companies have relied on Safe Harbour to comply with the “EU Data Protection Directive 95/46/EC” (the “Directive”) on the protection of personal data, and – more practically – to transfer personal data from the EU to the US. Indeed the Safe Harbour has been for fifteen years the “bridge” for thousands of businesses to cope with the many differences between the American and the European regulations. While the United States has a patchwork of various state laws on the privacy topic, the EU has a broad overarching law covering all industry sectors , the “Directive”, which prohibits the transfer of personal data outside of the EU unless there is an “adequate level of protection of the data.”

In order to facilitate business, the two superpowers negotiated a “Safe Harbour” agreement that allowed US companies to process and transfer EU citizens’ personal data only after qualifying for certain rules and principles. The Safe Harbour Framework indeed required adherence to guidance materials and seven basic principles: notice, choice, onward transfer, security, data integrity, access and enforcement. Under Safe Harbor, companies were basically free to transfer personal data from the EU to U.S in compliance with the EU Data Protection Directive and European privacy laws.

The NSA Leaks and the Schrems case

Post the Snowden scandal, more than 2 years ago, things have changed though. Edward Snowden’s National Security Agency leaks indeed showed that European data stored by US companies was not safe from surveillance that would be illegal in Europe, and many regulators, organisations and people started to become dig the matter further.

Maximillian Schrems, an Austrian law student and Facebook user, then argued that the Irish Data Protection Commissioner failed to protect him from mass surveillance by the US NSA. Schrems argued that the actions of many large US firms like Facebook, that basically store all – or at least a vast majority of – their customers data in the USA and then transfer personal data to the NSA as part of the infamous PRISM program, did not provide adequate protection of EU citizens’ data being transferred to third countries.

So the European Court of Justice was asked to investigate and to eventually rule on whether the Safe Harbour Framework was able to sufficiently protect the EU citizen under the EU Data Protection Directive. The court found that the Safe Harbour was “inadequate” to serve its original purpose, and that it did not “satisfy the requirements of the directive”.

The Court’s ruling

“The Court declares the Safe Harbour Decision invalid”, the official document by the Curia stated. “This judgment has the consequence that the Irish supervisory authority is required to examine Mr Schrems’ complaint with all due diligence”, it also declared. The document also cited that “even if the Commission has adopted a decision”, the national supervisory authorities, when dealing with a claim, “must be able to examine, with complete independence, whether the transfer of a person’s data to a third country complies with the requirements laid down by the directive”. Those are heavy words which are destined to change the entire game.

What happens now?

The full impact of this decision is currently hard to see, but for sure the future of cross border data transfers between the EU and US becomes now a big question-mark. By scrapping the Safe Harbour, the European Court of Justice has practically and immediately returned the issue to the hands of regulators in each country: from this moment onwards each EU member nation will decide its own way when it comes to interact with the US on data privacy and handling.

The impact on business

From a business point of view, this could turn into a real nightmare for American firms, as we said. US companies (potentially not only tech firms) that do business in Europe could be requested to keep data locally in each country that they operate in. Moreover, the decision creates new legal risks for companies and surely puts at risk all the bloc’s plans to create a single digital market, because it will jeopardize the region and the possibilities of doing business here by non-EU companies. Indeed now it might happen that one country might block a company’s transfer to the US while the regulator in another gives the green light. Indeed pretty fare from the “unity” dream Commissioners are foreseeing.

“What we need now is to work closely with the Americans to find a solution to get a safe ‘Safe Harbour’, which is in the interest of both Europeans and Americans”, briefly stressed Andrus Ansip, European Commission Vice-President in charge of digital single market. Mr. Ansip also said he would be meeting with businesses next week to discuss practical concerns but urged the EU and the U.S. to continue work towards creating a new Safe Harbour agreement.

A Trans-Atlantic case

Last weeks’ decision once again unveils the many differences between two of the worlds’ pioneers in privacy and data protection laws, which as one can imagine we’ll have huge impacts in the negotiations of trans-Atlantic deals such as TTIP.

It is impossible to determine in detail now the scale of the shock the ruling by the ECJ will have on real economy, but it will for sure add pressure on the ongoing negotiations between the two blocks around data protection, and possibly on all the other matters which are found on the Transatlantic table of negotiations.