New EU Regulations' Implications for U.S. Businesses

The world of data privacy and cybersecurity in the Europe Union has become awash with new regulation and other fundamental changes over the last few months. October saw the bombshell of a European court invalidating a long-relied-upon safe harbor program. December brought a new data privacy regulation which is set to replace decades-old EU privacy principles in 2018. This was followed by the announcement of a new network and information security directive which will soon introduce specific laws regarding network and information security across the EU. All this against a back-drop of regulation which has been either nonexistent or stagnant or for quite some time.

Safe Harbors and Privacy Shields

The EU prohibits the transfer of personal data to a country outside the European Economic Area unless that country ensures an "adequate level of protection" for the data. The U.S. is not deemed to provide this adequate level of protection, but U.S.-based companies were able to receive transfers of personal data if they self-certified under a "safe harbor" scheme agreed upon by the U.S. and EU regulators. Thousands of U.S. and EU companies relied on this scheme - it was a two-way benefit.

But late last year, the highest European court said the regime was invalid, due in part to perceived mass surveillance practices by the U.S. authorities. Data transfers which previously relied on this scheme could now be subject to investigation and enforcement by EU data protection authorities, pending any replacement to the safe harbor.

So the market must rely on alternatives. Options include (i) obtaining the consent of the individual to whom the data relates, (ii) binding corporate rules that companies abide by or (iii) pre-agreed data transfer contracts to be entered into between the EU and U.S. entity, all of which have their limitations for both EU and U.S. entities, and are the subject of much criticism.

As of this writing, details of a replacement to the safe harbor, titled the "Privacy Shield," have not been unveiled. Text has not been provided, and it is still subject to agreement by various interested governmental bodies. A few key elements have been published though: clear conditions, limitations and oversight mechanisms regarding the ability of the U.S. government to access data for national security and law enforcement purposes; the creation of an ombudsperson within the State Department to receive and respond to concerns and complaints regarding data access by the U.S. law enforcement and intelligence agencies; and multiple avenues for resolution of disputes between European individuals and U.S. companies, including a requirement that companies offer Europeans the option of choosing forms of alternative dispute resolution, at no cost to the individual.

General Data Protection Regulation

This regulation is an overhaul of the existing EU privacy and data protection law - to try and summarize all of the changes here would do it an injustice. There are, however, a number of changes that have direct impacts on the U.S. companies.

Most notable is the extraterritorial reach of the regulation. Previously, EU privacy law applied only to those entities with an establishment or equipment in the EU who control the use of the data. However, the new regulation applies directly to any entity that processes personal data about EU residents in connection with (i) the offer of goods or services in the EU; or (2) the monitoring of behaviour in the EU - irrespective of the location of the entity undertaking the processing. This is a huge shift. When assessing this, regulators will look (for example) to how a website references EU individuals, the currencies accepted and languages used. In addition, any profiling of EU individuals will fall squarely within this criteria.

With regard to actual transferring of personal data, both data exporters and importers must ensure contracts meet certain base requirements, with audit rights and consent to subcontracting being mandatory provisions. Other existing methods of transfer, such as model contractual clauses, binding corporate rules and permitted transfers to pre-approved countries, have broadly survived.

So what does this mean? U.S. companies falling within the long arm of the EU regulator will need to appoint a representative within the EU for the purpose of compliance with the regulation and will be responsible of notifying EU data controllers of any breach. Such companies will also be subject to an express obligation to demonstrate compliance with the data protection principles (i.e., implementing appropriate technical and organizational measures, potentially through the adoption of tailored policies). Public companies will need to appoint data protection officers and generally U.S. companies are now "on the hook" for their actions or inactions. Breach of relevant provisions can attract fines of up to 4 percent of annual worldwide turnover, depending on the severity of the breach. If it was ever needed, this should be enough to throw a spotlight on the new regime.

Network and Information Security Directive

Moving away from pure data and more to security, the draft network and information security directive imposes a range of security requirements and incident notification obligations on a number of categories of companies. This includes "digital service providers," which are providers of certain online marketplaces, online search engines or cloud computing services, expressly excluding certain micro and small enterprises, hardware manufacturers and software developers.

The geographic reach of the directive is also broad reaching to digital service providers outside the EU which offer services to persons within the EU. This will require more than merely a website being accessible in a member state, with factors such as website language and accepted currency being considered in determining applicability. Obligations imposed include the need take appropriate and proportionate technical and organizational risk management measures and compliance with certain reporting schemes, which may be made public.

Companies across the globe must assess whether they fall within the scope of this directive, and if so, assess both the security obligations and incident reporting requirements that are likely to be imposed on them. It is anticipated that the directive will be formally adopted in spring 2016 and each member state will have 21 months from the publication of the directive to implement it into national law, so it will likely become binding sometime in 2017 or 2018. It remains to be seen how harmonized this law will be as each member state has discretion to implement the directive. That said, the general principles should be noted, and country specific developments monitored.

A Final Word...

While the Data Protection Regulation and the network and information security directive have been subject to public discussion and finalization over a number of years, the safe harbor invalidation caught the market off guard, overshadowing what are fundamental pan-European legislative changes with global consequences. Like the growth of the Internet, the regulatory framework that governs the Internet is increasingly spanning geographic borders with little respect for national boundaries. No longer is EU law solely the concern of the Europeans, but more and more it is becoming the concern of board rooms across the U.S. and beyond.

Now is not a time for panic. It is time for acceptance of a new era of regulation emanating from Europe and a time for reasoned assessment of the implications of these developments on U.S. businesses.

Originally published in the Daily Journal on February 8, 2016.