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.

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