In the early hours of October 6, 2015, United States time, the Court of Justice of the European Union announced its decision striking down the US/EU Safe Harbor framework. This Dykema Client Alert explains what the court’s decision means and how you can respond.

What Was the Safe Harbor and Why Was it Important?

Privacy protections for citizens of European Economic Area (“EEA”) member countries are much more rigorous than the privacy protections in places outside of Europe – like the United States. Further, European law requires that those rigorous European-style protections stay attached to personal data even when it leaves the EEA.

The Safe Harbor provided a way in which U.S. companies could bring European personal data over to the U.S. while maintaining the required protections. Companies who signed up for the Safe Harbor registered with the U.S. Department of Commerce and agreed to abide by a set of privacy principles approved by the European Commission (the “EC”) in 2000. Participants agreed to let the Federal Trade Commission enforce compliance with those principles. In this way, the European personal data landed in the U.S. with all of the appropriate protections intact and backed up by the U.S. government’s enforcement.

This provided a key advantage. Because the Safe Harbor existed at a high level (approved by the EC), complying with the Safe Harbor requirements satisfied the requirements of all 31 EEA member states. The individual data protection authorities (“DPAs”) in those countries could not challenge Safe Harbor transfers under their individual countries’ laws.

Business is increasingly electronic and increasingly global, so it’s important to be able to move personal data—which includes customer and employee data. Business between the U.S. and Europe constitutes one of the largest commercial channels in the worldwide economy. In the course of participating in this channel, more than 4,000 companies have signed up for the U.S. Safe Harbor and rely on it on order to move personal data to the U.S., and process or store it in the U.S. More than half of those companies are small or medium-sized enterprises.

What Happened to the Safe Harbor?

On October 6, 2015, the Court of Justice of the European Union invalidated the EC decision from 2000 that established the Safe Harbor. Max Schrems, an Austrian privacy activist, brought a claim to the Irish data protection authority saying that the U.S. government’s mass surveillance program, revealed by Edward Snowden, shows that the U.S. does not have adequate protections for personal data. The European high court agreed and invalidated a 2000 EC decision that approved the Safe Harbor.

What Does Invalidation of the Safe Harbor Mean?

First and foremost, it means that transfers of European personal data under the Safe Harbor are no longer safe from scrutiny by individual country DPAs.

Transfers can continue to occur and it is possible that local DPAs will accept transfers under the Safe Harbor principles. But there’s substantial uncertainty and some DPAs will inevitably decide that transfers under the Safe Harbor principles do not provide adequate protection of European personal data from their respective countries. In particular, there seems to be little doubt that Germany will declare such protection inadequate. Accordingly, the most attractive part about the Safe Harbor – the creation of a one-stop shop that works for all of the EEA – is gone.

Further – and perhaps most importantly – individual EEA citizens can now bring claims to their respective DPAs alleging violation by U.S. companies of EEA privacy law. Until the invalidation, DPAs could deflect those claims. Now, the DPAs not only may investigate such claims, they must investigate them. Several data privacy commentators have noted that the field of potential enforcement sources has just gone from 31 DPAs to 500 million individuals (the approximate number of citizens of EEA member countries).

DPAs (including those in the UK and Germany) have already said that they are under-staffed and not equipped to undertake a massive influx of claims by their citizens. Assuming that DPAs will use scarce resources to go after the most egregious claims first, U.S. companies that are doing their best to comply and that are taking European law seriously will not be as likely to be the subjects of early enforcement.

What Do I Do Now?

If you’re currently covered by the Safe Harbor, you can sit tight to some extent and there’s no immediate reason to dismantle your Safe Harbor activities. There’s no guarantee that any DPA will accept your company’s compliance with the Safe Harbor principles as adequate, but a DPA might accept it and that’s reason enough to keep it in place.

Additionally, your Safe Harbor program – if implemented thoughtfully and comprehensively – is a good start toward both Binding Corporate Rules (discussed below) and the compliance programs that would be required in order to put in place Standard Contractual Clauses (also discussed below).

You should consider alternative arrangements. The alternative arrangements are less efficient and require more work and expense, but they provide more certainty than the non-invalidated Safe Harbor.

The EC has authorized so-called “Standard Contractual Clauses” or “SCCs, “which are form contracts that create the kinds of protections that the Safe Harbor used to provide. There are three forms: Two that handle transfers between “controllers” (companies that decide how, when, and why personal data is to be processed) and one that handles transfers from controllers to “processors” (companies that process personal data at the direction of controllers). You can use SCCs between particular parties (e.g., one-off arrangements to cover vendor-customer relationships) or entire enterprises (e.g., to allow transfers among constituent companies within a larger enterprise).

The other option is so-called “Binding Corporate Rules” (or “BCRs”), which are intra-enterprise privacy policies that are approved by several different DPAs in Europe. BCRs take a long time and are very expensive (both financially and in terms of effort) to implement. Only 50 or so enterprises have had BCRs approved: Mostly IT, and pharmaceutical companies and all of them very large. BCRS are generally not an option for smaller enterprises.

Several commentators have suggested that SCCs and BCRs might be subject to the same sort of attack that invalidated the Safe Harbor. That said, no such attack is presently afoot and both European and U.S. officials are working to determine next steps.

How Are Companies Dealing with the Change?

The invalidation of the Safe Harbor has caused many companies to reassess their data flows. Indeed, it is not possible to understand the effect of today’s events on a particular company without understanding what data the company uses, where the data comes from, where it goes, and the purposes for which it is used. Those that do not have a comprehensive privacy impact assessment (“PIA”) program in place are moving to adopt them. Those that have PIAs in place are analyzing their data flows to determine whether, and to what extent, they are affected by the absence of the Safe Harbor.

We’ve already begun to see more overt reactions from companies in the market, mostly those in the IT industry. By mid-morning the day of the announcement, several major IT companies had begun circulating addenda to their contracts with customers that consisted of a cover document and the appropriate (usually controller-to-processor) SCCs. It seems likely that many companies will use the SCCs as a means of backstopping their data transfers, whether as addenda to existing agreements or as larger frameworks with customers and vendors.

Others have begun planning to use SCCs in broader ways, such as by putting in place comprehensive networks of SCCs for their enterprises. This is most helpful when data moves within an enterprise, as opposed to between unaffiliated companies.

Is Anything Else on the Horizon for European Privacy Law?

Yes. European lawmakers expect to enact a General Data Protection Regulation (the “GDPR”) soon. The proposed regulation, released on January 25, 2012, is intended to unify data protection within the European Union, providing a more uniform, predictable regulatory framework. Since the introduction of the proposal, a committee of EU lawmakers has considered thousands of amendments. It is anticipated that the GDPR will be adopted in late 2015 or early 2016 and that enforcement will begin in 2017 or 2018. There is no indication that the GDPR will provide a new Safe Harbor program, but it is possible that the European lawmakers will address this new need in a revised draft GDPR between now and the end of the year.