Monthly Archives: September 2015

Safe Harbor Framework for EU to US Personal Data Transfers May Not Be “Adequate” After All

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This week, the Advocate General of the European Court of Justice (ECJ) issued a preliminary and non-binding assessment in an ECJ case recommending that the ECJ find the US-EU Safe Harbor Framework to be invalid.

For US companies with European subsidiaries that regularly need to transfer data back to the US home office, one of the primary data privacy considerations is compliance with the EU’s Data Protection Directive. Each EU member state has adopted their own data protection law based on the Directive. The Directive covers personal data in the European Economic Area (the EU, Iceland, Liechtenstein and Norway).

Under Article 25 of the Directive, the transfer of personal data to a country or territory outside of the EEA is prohibited unless that country or territory can guarantee an “adequate” level of data protection in the eyes of the EU.  In some cases, the EU will declare a country to have “adequate” protections in place (e.g., Canada based on their national PIPEDA data privacy law).

The US is one of the countries that is not deemed “adequate” by the EU.  (The US does not have a comprehensive national privacy law like Canada or the EU, but instead uses a “sectoral” approach to regulate data privacy.)  Because of this, the EU controller of the personal data must ensure that the US company receiving the data has an adequate level of protection for personal data to permit the data transfer.  This can be achieved in a number of ways, including:

  • The Directive defines a number of situations in which adequacy is presumed statutorily, such as where the data subject consents to the transfer, the transfer is necessary for the performance of, or conclusion of, the contract between the data subject and data controller, or it is necessary to protect the vital interests of the data subject.
  • A company’s Board of Directors can adopt binding corporate rules requiring adequate safeguards within a corporate group to protect personal data throughout the organization.
  • The EU entity and US entity can enter into an approved contract (utilizing a model contract terms approved by the EU) with provisions ensuring data is adequately protected.
  • The transfer is to a US entity which participates in the Safe Harbor Framework, a program agreed upon by the US and EU in 2000 under which US companies that self-certify that their data protection policies and practices are in compliance the requirements of the Framework are deemed to have an “adequate” level of data protection for EU data transfer purposes.  Over 5,000 companies have certified their compliance with the Safe Harbor Framework.

Edward Snowden’s revelations regarding US government surveillance programs and practices created many questions regarding whether the Safe Harbor Framework was truly “adequate” for EU purposes, since regardless of a company’s own policies and practices the US government could access the personal data of EU data subjects stored on US servers.  This week, in a case brought by an Austrian student challenging the transfer of his data to the US by Facebook under the Safe Harbor framework, the Advocate General of the European Court of Justice (ECJ) issued a preliminary and non-binding assessment recommending that the ECJ find the Safe Harbor Framework to be invalid.  The ECJ can ignore the Advocate General’s recommendation, but does so only rarely.

The language of the decision will be very important, as the potential for US government surveillance of and access to personal data of EU data subjects stored in the US goes beyond the Safe Harbor framework.  A broad decision could create problems for the ability of US companies to achieve adequacy for EU data transfer purposes, regardless of the adequacy approach used — US government surveillance could be determined to trump any adequacy approach taken by US companies in the eyes of the EU. However, a finding that the US government’s surveillance practices call into question the adequacy the transfer of data to US companies in general could cause major headaches and disruptions for US businesses, and would have political and economic ramifications. It will be interesting to see how deep down this rabbit hole the ECJ is willing to go.

Companies which participate in the Safe Harbor Framework should immediately start looking at alternative choices for achieving “adequacy” in the eyes of the EU to allow for continued data transfers.  Companies should also look at whether any of their vendors rely on safe harbor in the performance of obligations, and contact them regarding their contingency plans if Safe Harbor is found to be invalid. If the ECJ adopts the Advocate General’s recommendation, it is unclear whether they will provide any grace period to all companies to implement an alternative approach.  Public reporting companies participating in the Safe Harbor framework may also want to consider whether this uncertainty should be cited in their risk factors for SEC reporting purposes.

FTC opens their nationwide tour to promote Start with Security

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It’s not the latest group on tour with a band name and album name that needed a lot more thought.  Earlier this year, the FTC announced that they would be releasing guidance for businesses on data security.  In June, they did just that, releasing a guide called Start with Security: A Guide for Business.  It’s subtitled “Lessons Learned From FTC Cases” for a reason — it uses the 50+ FTC enforcement actions on data security to provide ten lessons companies should learn when approaching to security to avoid others’ missteps that led to enforcement actions, and practical guidance on reducing risks.  The lessons are:

  1. Start with security.  The FTC has long advocated the concept of “privacy by design,” meaning companies should bake an understanding of and sensitivity to privacy into every part of the business, making it part of the design process for new products and processes.  The FTC is advocating a similar concept of “security by design.” Guidance:  don’t collect personal information you don’t need (the RockYou enforcement action); don’t use personal information when it’s not necessary (Accretive and foru International); don’t hold on to information longer than you have a legitimate business need for it (BJ’s Wholesale Club).
  1. Control access to data sensibly.  Keep data in your possession secure by controlling access to it – limit access to those with a need to know for a legitimate business purpose (e.g., no shared user accounts, lock up physical files). Guidance: don’t let employees access personal information unless they need to access it as part of their job (Goal Financial); don’t give administrative access to anyone other than employees tasked administrative duties (Twitter).
  1. Require secure passwords and authentication.  Use strong password authentication and sensible password hygiene (e.g., suspend password after x unsuccessful attempts; prohibit common dictionary words; require at least 8 characters; require at least one upper case character, one lower case character, 1 numerical character, and 1 special character; prohibit more than 2 repeating characters; etc.)  Guidance: require complex and unique passwords (Twitter); store passwords securely (Guidance Software, Reed Elsevier, Twitter); guard against brute force attacks (Lookout Services, Twitter, Reed Elsevier); protect against authentication bypass such as predictable resource location (Lookout Services).
  1. Store sensitive personal information securely (“at rest”) and protect it during transmission (“in motion”). Use strong encryption when storing and transmitting data, and ensure the personnel implementing encryption understand how you use sensitive data and can determine the right approach on a situation-by-situation basis.  Guidance: Keep sensitive information secure throughout the data life-cycle (receipt, use, storage, transmission, disposal) (Superior Mortgage Corporation); use industry-tested and accepted methods (ValueClick); make sure encryption is properly configured (Fandango, Credit Karma).
  1. Segment your network and monitor who’s trying to get in and out.  Be sure to use firewalls to segment your network to minimize what an attacker can access.  Use intrusion detection and prevention tools to monitor for malicious activity.  Guidance: segment your network (DSW); monitor activity on your network (Dave & Buster’s, Cardsystem Solutions).
  1. Secure remote access to your network. Make sure you develop and implement a remote access policy, implement strong security measures for remote access, and put appropriate limits on remote access such as by IP address and revoking remote access promptly when no longer needed.  (The compromise of a vendor’s system via phishing, leading to remote network access, is how the Target breach started.)  Guidance: ensure remote computers have appropriate security measures in place, e.g., “endpoint security” (Premier Capital Lending, Settlement One, LifeLock); put sensible access limits in place (Dave & Buster’s).
  1. Apply sound security practices when developing new products. Use “security by design” to ensure data security is considered at all times during the product development life-cycle.  Guidance: Train engineers in secure coding (MTS, HTC America, TrendNet); follow platform guidelines for security (HTC America, Fandango, Credit Karma); verify that privacy and security features work (TRENDnet, Snapchat); test for common vulnerabilities (Guess?).
  1. Make sure your service providers implement reasonable security measures. Make sure you communicate your security expectations to your service providers and vendors, and put their feet to the fire through contractual commitments and auditing/penetration testing. Guidance: put it in writing (GMR Transcription); verify compliance (Upromise).
  1. Put procedures in place to keep your security current and address vulnerabilities that may arise.  Data security is a constant game of cat-and-mouse with hackers – make sure to keep your guard up.  Apply updates to your hardware and software as they are issued, and ensure you are spotting vulnerabilities in, and promptly patching, your own software. Have a mechanism to allow security warnings and issues to be reported to IT.  Guidance: update and patch third-party software (TJX Companies); heed credible security warnings and move quickly to fix them (HTC America, Fandango).
  1. Secure paper, physical media, and devices.  Lastly, while the focus these days seems to be on cybersecurity, don’t forget about physical security of papers and physical media.  Guidance: securely store sensitive files (Gregory Navone, Lifelock); protect devices that process personal information (Dollar Tree); keep safety standards in place when data is en route (Accretive, CBR Systems); dispose of sensitive data securely (Rite Aid, CVS Caremark, Goal Financial).

As this guidance is based on what companies did wrong or didn’t do that led to FTC enforcement actions, it will be interesting to see how the FTC treats a company that suffers a data breach but demonstrates that they used reasonable efforts to comply with the FTC’s guidance.  I suspect the FTC will take a company’s compliance with this guidance into consideration when determining penalties in an enforcement action. The guidance is very high-level, so companies must rely on their IT and Legal teams to determine what steps, processes and protocols need to be implemented in alignment with the FTC’s guidance.

In addition to publishing the guide, the FTC has embarked on a conference series aimed at SMBs (small and medium-sized businesses), start-up companies, and developers to provide information on “security by design,” common security vulnerabilities, secure development strategies, and vulnerability response.  The first conference took place September 9 in San Francisco, CA; the second will take place November 5 in Austin, TX.

The FTC also announced a new website at which they’ve gathered all of their data security guidance, publications, information and tools as a “one-stop shop”.  You can find it at http://www.ftc.gov/datasecurity.

Podcast – the in-house perspective on trade secrets, privacy, and other topics

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I recently had the privilege of being interviewed for IP Fridays®, a podcast series by Ken Suzan (of counsel and a trademark attorney at the Minneapolis office of Barnes & Thornburg LLP, and Dr. Rolf Claessen, partner at Patent Attorneys Freischem in Cologne, Germany.  We discussed the in-house perspective on a variety of topics, including trade secrets, copyrighting software code, and privacy.  Head to IPFridays.com if you’d like to listen, or click here to head straight to the podcast.