Do the New EU Processing Clauses Apply to You?

A new set of EU standard contract clauses  (“SCCs” or “model contracts”) for processing European personal data abroad came into effect on May 15, 2010. Taken together with a recent opinion by the official EU “Article 29” working group on the concepts of “controller” and “processor” under the EU Data Protection Directive, this development suggests that it is time to review arrangements for business process outsourcing, software as a service (SaaS), cloud computing, and even interaffiliate support services, when they involve storing or processing personal data from Europe in the United States, India, and other common outsourcing locations.

I reported in February about the European Union adopting a new set of SCCs to legitimize the transfer of European personal data to foreign processors. From May 15 onward, the new SCCs must be used unless there is another legal basis for the transfers, such as the EU-US “Safe Harbor” program.

Here is a summary of the impact of this EU decision, in the form of FAQs:

Why Use Standard Contract Clauses?

The EU Data Protection Directive requires national authorities to forbid the transfer of personal information to countries outside the European Economic Area (EEA) unless the data will be adequately protected by law or a specific derogation, such as approved SCCs or the individual’s informed consent, applies.

The United States, India, China, the Philippines, Jamaica, South Africa, and other common destinations for outsourced data services do not have similar data protection laws and are not deemed to provide an “adequate level of protection.” US companies that participate in the “Safe Harbor” framework for handling European personal data in the US, or sending it onward for processing in a third country, are treated as offering adequate protection. So are multinationals that implement Binding Corporate Rules (“BCRs”) approved by each of the relevant European countries for data transfers within a corporate group. But apart from transfers to Safe Harbor companies or in certain narrow contexts such as express consent or BCRs, offshoring arrangements involving personal data typically do not comply with European national data protection laws unless the company in Europe enters into a contract with the foreign vendor that includes EU-approved SCCs.

(It is also possible to seek approval from each relevant country for a unique set of contractual clauses, but this is an uncertain and time-consuming alternative that few organizations pursue.)

There are good reasons for a US company to consider Safe Harbor or BCRs, although these are beyond the scope of this article. But in any event, there will almost certainly be contexts in which neither Safe Harbor nor BCRs will cover all the data transfers that the company requires, such as data transfers outside the corporate group or directly from Europe to vendors outside the United States. In those cases, SCCs will typically be required.

What Countries Accept the EU SCCs?

EU-approved SCCs are ostensibly a passport for personal data from all 27 EU member states plus the other three EEA countries – Iceland, Liechtenstein, and Norway. However, one EU member state, Hungary, has not yet conformed its national law to routinely allow data transfers based on SCCs (or on Safe Harbor or BCRs, for that matter); individual consent is still required in most cases in Hungary.

Outside the EEA, Switzerland and Israel, which have similar data protection regimes, allow the transfer of personal data abroad if the companies use EU-approved SCCs. There are also instances where other non-EEA countries, such as Russia, have approved data transfers under contracts employing the EU SCCs, on a case-by-case basis.

This does not mean that a company can sign an agreement including, or annexing, SCCs and just start transferring personal data to an affiliate or vendor in the US or India. Unlike transfers to “adequate” countries such as Canada or to US Safe Harbor companies, data transfers under SCCs require notification to the data protection authorities (DPAs) in many European countries, and in some countries the transaction must await prior approval by the local DPA. In the UK, notice is effected simply by checking a box on an online registration form. In France, Spain, or The Netherlands, on the other hand, the European company must submit details and await an official response. In Germany, the internal data protection officer must approve the transfers, and approval may also be required from a works council or labor union if the outsourcing involves employee data.

If a company does not vary from the text of the EU SCCs and attaches a satisfactorily detailed annex describing the data transfers, including any special provisions for protecting sensitive categories of personal information, authorization should be forthcoming. But authorization often takes as long as three or four months in some countries. This should be factored into project and contract timing.

What Do the SCCs Provide?

One of two different versions of EU-approved “controller-controller” SCCs must be used if the data controller in Europe is transferring personal data to a foreign data controller, such as a parent, affiliate, or business partner that will make its own use of the data. For transfers to a processor that is merely handling the data on behalf of a European data controller, the newly adopted version of “controller-processor” SCCs must be employed.

The SCCs, which must be made available to the authorities and affected individuals on request, identify the “data exporter” in Europe and the “data importer” overseas. In contracts with processors, the processor must agree to follow the instructions of the data controller and maintain the confidentiality and security of the data. In the case of contracts between data controllers, each of which can use the data for its own purposes, the relevant SCCs allow the parties to select the governing European data protection law or a minimum set of data privacy principles.

SCCs provide for third-party beneficiary liability to the affected individuals and allow the data exporter to terminate the entire data transfer agreement if the data importer fails to comply with the SCCs. The SCCs also require the parties to annex a description of the covered data transfers in a prescribed format.

What’s Different about the New Processing SCCs?

The chief difference between the new controller-processor SCCs and the prior version published in 2001 is that the new SCCs take account of the trends to subcontract storage, technical support, or specific processing functions to third parties. When such “subprocessing” is contemplated, the new SCCs require the vendor to obtain the customer’s consent to subprocessing and execute written agreements with the subprocessors placing them under the same obligations to protect the personal data. The customer is also required to maintain a list of such subprocessing agreements and make it available on request to the data protection authorities, who may audit any subprocessing.

Here are some examples where these changes will typically involve more investigation and documentation than previously:

• An outsourcing vendor in the US plans to have some contracted functions performed by its affiliates in India or China.

• A cloud computing vendor aggregates services and hosting provided by a network of third parties.

• A parent company in the US, which has been providing technical support to European affiliates under SCCs, plans to outsource some support functions to vendors.

Are Existing Vendor Contracts Grandfathered?

Yes. Contracts in place before May 15, using the older version of EU-approved processing SCCs, may continue without revision until they expire, or until the nature of the data transfers changes materially or the vendor seeks to add a subprocessor.

Should We Use the Controller or Processor SCCs?

Sometimes it’s hard to tell which SCCs to use, because it is a factual question whether the data importer is in some respects acting as a controller of the data as opposed to acting as a mere processor. Simply saying in the contract that the data importer is only a processor may not preclude a different opinion by the authorities or the courts.

A parent company in the US, for example, may support global communications and ERM functions on behalf of its European subsidiaries, similar to what an unrelated outsourcing vendor might provide. But if the US parent also has access to the European data for its own purposes – such as corporate planning, career development and succession planning, and perhaps global insurance, audit, or legal functions – the US parent looks more like a data controller with respect to those purposes. Thus, a US parent company might be viewed as both a controller and a processor of European data.

Similarly, a global company may retain a benefits provider, perhaps to manage an employee stock option program or administer a pension fund. To the extent that the benefits provider simply performs functions at the employer’s behest, it appears to be a processor. But if the benefits provider also markets and provides additional services directly to the employees, it seems to be taking on the role of a controller.

In most European countries, the parties could safely rely on the controller-controller SCCs in such cases of mixed use. However, DPAs (especially in Greece) sometimes insist on separating the functions and require the data importer to sign two SCCs, one as a controller and the other as a processor. European Commission staff reports have occasionally noted the potential ambiguities in this, and other, applications of the controller and processor concepts, but as yet there is not a uniform and predictable approach to the problem.

The EU Data Protection Directive primarily regulates data controllers. A controller is defined in Article 2 of the Directive as the natural or legal person or public agency that “alone or jointly with others” determines “the purposes and means of processing” personal data. A processor is a natural or legal person or agency that processes data on behalf of a controller. “Processing” is defined very broadly in the Directive to include collection, use, storage, manipulation, disclosure, disposal, and virtually any other action with personal data. A controller can decide either to process personal data itself or delegate some or all processing activities to a processor. International data transfer agreements using SCCs always involve a data controller in Europe transferring personal data to either a controller or processor abroad.

In February, the Article 29 Data Protection Working Party, comprised of data protection officials from the European Commission and each of the member states, issued Opinion 1/2010 on the concepts of “controller” and “processor.” The concepts are important, of course, not only in choosing which SCCs to use in international transfers, but more importantly in deciding who has ultimate responsibility for protecting and properly using personal data, and which country’s law applies.

The Article 29 Working Party Opinion identifies controllers as the entities that decide to have some personal data processed for their own purposes. It recognizes that multiple parties (such as a parent company and its affiliates or business partners) may collectively decide which data elements are needed and how they will be handled. They need not have equal voices in those decisions, and their respective responsibility and liability may be limited to their own decisions. The Working Party also concluded that a processor may have some discretion in determining “the most suitable technical and organizational means” to accomplish delegated processing, without becoming a controller.

The Opinion, in my view, supports the conclusions that many global companies have reached, that parent and affiliate companies in a group usually should be considered joint controllers of employee and customer data used for a variety of purposes within the group, and that third-party outsourcing vendors remain merely processors even if they propose and implement decisions about the means of processing, based on their expertise. When struggling with the controller/processor distinction, organizations should ask the basic questions, “who wants this personal data, and why?” as a guide to recognizing who is ultimately responsible for the data and who is merely crunching it on their behalf. Among other things, the answers to those questions will determine which set of SCCs to use for international data transfers.