United States: Effects Of Schrems Ruling On International Internal Investigations

Last Updated: October 14 2015
Article by Martha Stolley and Nicholas Schretzman

In a recent landmark decision, Maximillian Schrems v. Data Protection Commissioner, Europe's highest court struck down a US-EU agreement that allowed companies to move personal electronic data between the European Union and the United States.

In an October 6 ruling,1 the European Court of Justice (ECJ) deemed invalid the European Commission's decision in 2000 approving the so-called Safe Harbor program. Further, the ECJ ruled that EU data protection authorities have powers to investigate complaints about the transfer of personal data outside Europe (whether by Safe Harbor-certified organizations or otherwise). In addition, where justified, EU data protection authorities can suspend data transfers outside Europe until their investigations are completed.2

This ruling, which is final and cannot be appealed, is likely to have far-reaching effects on how US corporations investigate allegations of wrongdoing by affiliates and subsidiaries based in Europe, including investigations of potential violations of the US Foreign Corrupt Practices Act (FCPA).

The Safe Harbor Program

The US-EU Safe Harbor program3 was established in 2000 following the European Commission's finding that the United States has "inadequate" data protection laws.4 The effect of this determination would have been a severe restriction on the transfer of data from EU countries to the United States. Therefore, the European Commission and the US Department of Commerce agreed on the US-EU Safe Harbor program, which allows US organizations to receive personal data from Europe—provided that the US organizations certify that they have abided by certain standards of data processing that are comparable to EU data protection laws such that the EU citizens' personal data has been treated as adequately as if it had remained in Europe.

This data transfer framework between the European Union and the United States is operated by the US Department of Commerce and enforced by the Federal Trade Commission. More than 4,000 organizations have current self-certifications of adherence to Safe Harbor principles (see Safe Harbor List).

Implications of the ECJ's Decision in Schrems

In the Schrems decision, the ECJ ruled that the European Commission's approval of the Safe Harbor program in 2000 was "invalid" because, among other reasons, the United States' "public authorities" are not subject to the Safe Harbor program. Thus, according to the ECJ, US companies are "bound to disregard, without limitation" the Safe Harbor requirements when instructed to do so by US law enforcement. The ECJ also noted that the Safe Harbor program does not provide EU citizens with adequate rights of redress in the United States when they seek to protect or enforce their data privacy rights.

Based on the Schrems decision, the power of EU national data protection authorities to investigate suspected data breaches is significantly expanded. Individual European countries can now launch their own investigations into the handling of their citizens' personal data by US companies. Further, individual countries' data protection authorities can now challenge the heretofore legal transfer of data from Europe to the United States pursuant to the Safe Harbor program and, in serious circumstances, can suspend the transfer of some or all personal data to the United States. This could force US companies to host user data exclusively within the EU country unless a permitted exemption applies (such as the necessity to transfer data to defend against or bring legal proceedings).

Effects on International Internal Investigations

The ECJ ruling is likely to disrupt the thousands of US and EU companies that currently depend on the Safe Harbor program to do business overseas. In addition, the ruling likely will have immediate effects on how US-based companies conduct internal investigations of misconduct alleged to have occurred in the European Union—specifically, investigations of potential violations of the FCPA.5

A hallmark of any internal investigation into allegations of corruption overseas is the analysis of documents and communications originating within the country in which the corruption is alleged to have occurred. As part of these investigations, many US companies traditionally have relied on the Safe Harbor program to lawfully import data that originated in the EU in order to analyze it. Such companies either have Safe Harbor certification themselves, or they engage Safe Harbor-certified vendors such as accountancy firms or forensic consultants. Now that the ECJ has ruled that the Safe Harbor program is invalid and that EU individuals may appeal to their national data protection authorities to suspend the transfer of their data across borders, US corporations and their counsel will have to rethink the approach to the collection and transfer, processing, and analysis of overseas data.

The need to abide by EU data privacy laws in the absence of the Safe Harbor program is in tension with the very real risk that US law enforcement will punish a company for failing to sufficiently investigate possible violations of the FCPA—whether such violations were made by company employees, agents of the company, or third parties.6

Assistant Attorney General (AAG) Leslie R. Caldwell highlighted in recent remarks7 that the FCPA requires that businesses that "tend to be exposed to corruption must employ" internal controls that include an "effective process. . .for investigating and documenting allegations of violations." Investigations into such allegations often require the analysis and review of data (including electronic documents and correspondence) that originates in the country where the alleged corruption took place. In fact, it is almost always the case that large amounts of electronic data must be collected and analyzed. For reasons of logistics, cost, and security, US-based companies and their US-based legal counsel often seek to import such data to the United States for processing and review.

The primary legislation governing data protection in the European Union—including the export of data from the European Union—is Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 (the EU Directive). The EU Directive protects "personal data," which Article 2(a) broadly defines as "any information relating to an identified or identifiable natural person." Thus, data that was generated solely for purposes related to an employee's work can still be deemed "personal" and fall under the EU Directive. Pursuant to EU Directive Article 7(a), such personal data cannot be transferred to countries with "inadequate" data protection laws, which, as discussed above, the European Commission has stated includes the US.

In the past, US-based corporations have been able to get around this barrier either by participating in the Safe Harbor program themselves or by importing the sought-after data to a US-based data processing vendor or law firm that is self-certified as Safe Harbor-compliant. That law firm or vendor would then process the data for analysis and review. The ECJ ruling, however, vitiates the Safe Harbor option and empowers national data privacy regulators in Europe to investigate the transfer of personal data overseas (regardless of whether the recipients are Safe Harbor-certified) if there are concerns regarding the onward disclosure of personal data to US authorities or other third-party recipients. Indeed, pursuant to Schrems, those same regulators may suspend the data transfer for the duration of their investigation where there are justifiable grounds to do so.

Depending on how national regulators in the European Union choose to utilize the powers confirmed in the ECJ decision, US corporations seeking to perform internal investigations regarding operations in the European Union may be forced to conduct data processing and review within the borders of the subject EU country. That is, if particular national data privacy regulators agree with the ECJ's suggestion that it is impossible for data transferred to the United States to be afforded EU levels of protection because of US domestic law, then individual employees whose data is sought to be exported may successfully appeal to those regulators to block the transfer. In such a case, the US company's investigative team may be forced to conduct the collection, analysis, and review without ever removing the data from the subject country.

US corporations may also face difficulties in responding to requests or demands for information and documents from US authorities investigating their EU operations. For instance, AAG Caldwell recently highlighted the need for US corporations to "ensure compliance with the laws of all the countries in which they operate."8 Yet, in the same remarks, she also noted that the DOJ will "challenge what we perceive to be unfounded reliance" on certain "foreign data privacy laws" to which corporations traditionally cite in their objections to document demands.9

At the outset, the ECJ's invalidation of the Safe Harbor program should provide US corporations with a legitimate objection to certain US law enforcement demands for EU data. The legitimacy of that objection will likely depend on the information sought, the individual EU nation in which the data is housed, and the extent to which national data privacy regulators exercise their powers to block data transfers.

So Now What? Other Options to Transfer Personal Data to the United States

Prior data transfers under the Safe Harbor program were lawful. However, it is unclear whether companies may continue to process such data. Furthermore, any new data transfer under Safe Harbor lacks a legal basis from the ECJ's perspective and, therefore, could expose a company to liability.

Nevertheless, there are other methods that companies can use to transfer personal data to the United States, including securing free and informed consent to the transfer from the individual or from the local data protection agency (DPA). Consent from the former may be problematic in the case of the transfer of employee data, since consent must be explicit and freely given. In many European countries, you cannot rely on consent from employees because they are considered not to have freedom of choice when that consent is provided (unless it is provided in specific circumstances related to the investigation). Moreover, given the discretion generally required in internal FCPA investigations, neither of these options is preferable or even feasible. The company likely will not want to disclose the possibility of internal corruption to local regulators, nor will it want to alert a suspect employee to the internal investigation and thereby risk that the employee will destroy data and valuable evidence.

Another option is for the entity receiving the data to enter into a special standard data privacy agreement that has been approved by the European Commission, or Binding Corporate Rules (which allow a group company structure to transfer personal data to group entities internationally) that are pre-approved by one or more applicable DPAs. There is, however, a risk that the ECJ ruling could affect these options as well. In addition, some of the prior "adequacy" findings of the European Commission with other countries are now put into question.

The key permitted derogation under the EU Directive that can allow for personal data to be transferred to the United States and other non-European countries without breaching the prohibition on transferring data outside Europe is where such transfer is "necessary" to allow the organization to defend against or establish its legal rights. Typically, in the context of US regulatory investigations, this exception is construed narrowly, and there is a need to conduct a form of review of personal data within Europe before the "necessary" information containing personal data is transferred to the United States for further investigation and possible disclosure to US authorities. Furthermore, in some EU-European Economic Area jurisdictions, the DPA must be notified before the transfer can take place, and there are further legal restrictions on the amount of personal data that can be transferred, as well as how the data must be protected.

The Future of the Safe Harbor Program and US-EU Data Transfers

It is important to note that negotiators from the United States and the European Union sought to develop a new Safe Harbor program even before the ECJ ruling. In the event that a new agreement is reached, some of the issues discussed in this LawFlash may be addressed. In addition, the European Commission's or DPAs' future guidance for Safe Harbor-certified companies (which they have announced will be released in the next two weeks) also may affect the foregoing counsel.

There is no "one size fits all" solution for US companies when considering the legal implications that will result from the ECJ judgment; it will depend on the particular facts and circumstances in play. Further, many of the outstanding questions, at least at present, are in a state of flux. Therefore, we strongly advise that you reach out to legal counsel to discuss the facts and all of the options available to you.

Footnotes

1  See Judgment of the Court (Case C-362/14).

See our October 6, 2015 LawFlash " ECJ Rules EU-US Safe Harbor Programme Is Invalid" for a fulsome discussion of the Schrems ruling.

3 There is also a US-Swiss Safe Harbor Program; it is currently unclear whether this program will remain in place.

4 The European Commission's analysis was triggered by the implementation in 1998 of the European Union Directive on the Protection of Personal Data, which prohibits the transfer of data outside the EU to third-party nations that do not satisfy the EU test of "adequacy" in respect to privacy protections.

5 The Foreign Corrupt Practices Act prohibits employees of US companies or their affiliates or subsidiaries from offering or providing anything of value to a foreign official in an attempt to influence the action of that foreign official.

6 The US Department of Justice (DOJ) has made clear that companies who "turn a blind eye" to agents or third parties that engage in corrupt conduct on the company's behalf will also be considered liable.

7 See AAG Caldwell's full remarks by clicking here.

8 Id.

9 Id.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Moritt, Hock & Hamroff LLP
Morgan Lewis
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Moritt, Hock & Hamroff LLP
Morgan Lewis
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions