United States: Safe Harbor Is Dead, Long Live Standard Contractual Clauses?

For the past 15 years, the EU-U.S. Safe Harbor Framework has been one of the most popular data transfer mechanisms for organizations that engage in cross-border transfers of EU personal data to the United States. In the aftermath of the recent invalidation of the Safe Harbor Framework by the Court of Justice of the European Union (CJEU), many companies are contemplating alternative data transfer mechanisms to meet their business needs.

Since the CJEU's decision was announced on October 6, 2015, we have discussed the judgment itself, provided a list of FAQs and answers regarding its implications, and presented an informational webinar discussing the impact on businesses and possible next steps. In this blog post, we take a closer look at considerations for companies transitioning to one of the data transfer mechanisms that may offer a viable substitute for Safe Harbor certification: Standard Contractual Clauses (SCCs).

Why Standard Contractual Clauses?

For many organizations that have been using the Safe Harbor Framework to transfer personal data from the EU to the U.S., Standard Contractual Clauses (also referred to as "Model Clauses" or "Model Contracts") may provide a relatively straightforward and cost-effective alternative. SCCs are sets of contract clauses that were issued by the European Commission (the "Commission") pursuant to Article 26(2) of EU Data Protection Directive 95/46/EC for purposes of establishing safeguards to allow for the transfer of personal data from the EU to countries (such as the U.S.) that are not otherwise deemed to provide "adequate" protection for the data. Some of the advantages associated with the use of SCCs include the following:

  • The Commission's SCCs may be implemented quickly: when used verbatim, they constitute a preapproved method for complying with the Data Protection Directive's requirements concerning transfers of personal data out of the EU.
  • When properly implemented, SCCs command automatic recognition by EU data protection authorities (DPAs), permitting transfers without additional authorization necessary.
  • SCCs may be used in contracts involving personal data transfers from the EU to any jurisdiction, whereas the Safe Harbor Framework applied only to EU-U.S. transfers.
  • SCCs may be used for intra-company transfers as well as external transfers, as opposed to binding corporate rules (BCRs), which apply only to transfers within a corporate group.

Although it is possible to tailor the Commission's approved SCCs to meet specific organizational needs, such changes must be approved by the relevant EU member states' DPAs to be considered valid for data transfer purposes. "Automatic" recognition by the DPAs attaches only when the SCCs are implemented verbatim.

Which Set of Clauses Should You Use?

Several factors come into play when choosing the appropriate set of clauses for a given data transfer, including the roles of each party with respect to the data, operational aspects of the transfer, and the relationship(s) between the parties. First, the parties must establish whether they will be functioning as a Data Controller or as a Data Processor with respect to the transferred data. In short, the Controller is the entity that "determines the purposes and means of the processing" of personal data. To determine which party is the Controller, the European Commission has indicated in its FAQs that organizations should consider:

  • Who decides what personal information is going to be kept?
  • Who decides the use and purpose to which the information will be put?
  • Who decides on the means of processing of personal data?

In some cases, multiple organizations may fill these roles and would be considered Co-Controllers. A Processor, on the other hand, is an organization that "holds or processes personal data, but does not exercise responsibility for or control over the personal data."

A company may be both a Controller and a Processor with respect to different sets of data (e.g., a company may be the Controller of its employees' data, but a Processor of its customers' data). To the extent a part of a company is a Processor of data that the company controls, then the company as a whole is considered a Controller, unless the Processor is a separate legal entity owned by the Controller.

The European Commission has approved three sets of SCCs: two sets for data transfers from one Controller to another Controller, and one set for transfers from a Controller to a Processor.

Set II for Controller to Controller transfers is said to be more "business-friendly" than Set I – it was developed through a negotiation process between the European Commission and a coalition of business associations. Accordingly, Set II is considered more favorable to businesses with respect to the clauses concerning litigation, allocation of responsibilities, and auditing requirements, among others. As a counterbalance, Set II also grants DPAs greater powers to intervene and impose sanctions.

Whichever set is chosen, that set must be used in its entirety. Selecting and combining clauses from Set I and Set II to create a "hybrid" set would constitute modifications to the SCCs that would require approval from each of the relevant DPAs.

In March 2014, the Article 29 Working Party adopted draft SCCs for data transfers from EU Processors to non-EU Sub-Processors. Although not yet formally approved for use, these draft clauses may be instructive for companies engaging in such transfers.

What Information Must the Parties Provide to Implement SCCs?

For SCCs to operate "automatically," the standardized language must be adopted verbatim as approved by the European Commission. In addition, each set of clauses includes appendices that must be completed by the signatories. The information that must be included in the appendices varies slightly between the different sets of SCCs. For example:

  • All forms require the parties to list (1) identifying information for the exporting and importing organizations; (2) the categories of data being transferred (including whether "sensitive" personal data will be transferred); and (3) the categories of data subjects whose data will be transferred.
  • Controller to Controller SCCs additionally call for (1) a description of the purpose(s) of the transfer; and (2) an explanation of the recipients or categories of recipients to whom the transferred data may be disclosed.
  • Controller to Processor SCCs also must include (1) information regarding the processing operations to be performed; and (2) a description of the technical and organizational security measures the Processor has implemented to protect the data.

When completing the appendices to the SCCs, care should be taken to ensure that the information provided clearly and accurately describes the data transfer(s) contemplated under the agreement.

What About Works Councils?

In the EU, Works Councils are "bodies representing the European employees of a company" that allow workers to be "informed and consulted by management on the progress of the business and any significant decision at European level [sic] that could affect their employment or working conditions." Works Councils may be likened to labor unions in the United States, though they often are involved in administrative matters, including data protection issues, to a greater degree than their American counterparts.

The influence of a given Works Council may vary by company, and even by country: certain member states are known for having more aggressive Works Councils than others. In some cases, a company may need to obtain approval from the relevant Works Council(s) for data processing activities, which could include the transfer of employee personal data to the United States. The use of SCCs to send employee data to countries outside the EU may therefore be subject to review by a Works Council, which may impose restrictions on the transfer or even block the transfer.

Could the CJEU's Safe Harbor Decision Apply to Standard Contractual Clauses?

The dust has not yet settled with respect to the CJEU's Safe Harbor decision, and likely will not fully settle for some time. Though many companies are eager for guidance on how best to move forward, to date the European DPAs have not provided much specific information – with one notable exception.

On October 14, 2015, the DPA in the German federal state of Schleswig-Holstein released a position paper on the CJEU's decision, underscoring its stance that the current data protection regime in the U.S. does not provide the protection required for transfers of personal data from the EU. Going one step further than the CJEU, the DPA indicated that SCCs are not an adequate data transfer mechanism, stating that "[p]rivate bodies, which use Standard Contractual Clauses to transfer personal data to the US, now need to consider terminating the underlying standard contract with the data importer in the United States or suspending data transfers. In consistent application of the requirements explicated by the CJEU in its judgment, a data transfer on the basis of Standard Contractual Clauses to the US is no longer permitted."

It is unclear whether this position will be echoed by other European DPAs, or if the position itself is tenable. Indeed, given that paragraph 61 of the CJEU's judgment affirms that the CJEU alone has jurisdiction to declare a Commission decision invalid, the German DPA's blanket declaration that using SCCs for data transfers to the U.S. is "no longer permitted" could be subject to legal challenges.

Notwithstanding the comments from Schleswig-Holstein, on October 16, 2015, the Article 29 Working Party issued its own statement, confirming that "the Working Party will continue its analysis on the impact of the CJEU judgment on other transfer tools. During this period, data protection authorities consider that Standard Contractual Clauses and Binding Corporate Rules can still be used."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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