Unintended Consequences of the EU Safe Harbor Ruling

by on October 6, 2015 · 0 comments

The big news out of Europe today is that the European Court of Justice (ECJ) has invalidated the 15-year old EU-US safe harbor agreement, which facilitated data transfers between the EU and US. American tech companies have relied on the safe harbor to do business in the European Union, which has more onerous data handling regulations than the US. [PDF summary of decision here.] Below I offer some quick thoughts about the decision and some of its potential unintended consequences.

#1) Another blow to new entry / competition in the EU: While some pundits are claiming this is a huge blow to big US tech firms, in reality, the irony of the ruling is that it will bolster the market power of the biggest US tech firms, because they are the only ones that will be able to afford the formidable compliance costs associated with the resulting regulatory regime. In fact, with each EU privacy decision, Google, Facebook, and other big US tech firms just get more dominant. Small firms just can’t comply with the EU’s expanding regulatory thicket. “It will involve lots of contracts between lots of parties and it’s going to be a bit of a nightmare administratively,” said Nicola Fulford, head of data protection at the UK law firm Kemp Little when commenting on the ruling to the BBC. “It’s not that we’re going to be negotiating them individually, as the legal terms are mostly fixed, but it does mean a lot more paperwork and they have legal implications.” And by driving up regulatory compliance costs and causing constant delays in how online business is conducted, the ruling will (again, on top of all the others) greatly limits entry and innovation by new, smaller players in the digital world. In essence, EU data regulations have already wiped out much of the digital competition in Europe and now this ruling finishes off any global new entrants who might have hoped of breaking in and offering competitive alternatives. These are the sorts of stories never told in antitrust circles: costly government rulings often solidify and extend the market dominance of existing companies. Dynamic effects matter. That is certainly going to be the case here.

#2) Cross-border digital trade suffers: This conclusion follows from point #1, of course. Writing just before the decision was announced, lawyers as Norton Rose Fulbright’s Data Compliance Report blog noted that if the safe harbor was invalidated, “the impact on the world economy would be immense.” Well, here we are.  Dan Castro of ITIF hopes that EU and US officials can pull back from the brink of this impending disaster and “finish the process of creating a Safe Harbor 2.0 with terms that give comfort to all parties.” I suspect that many tech companies are hoping for the same miracle to occur. But don’t hold your breath. The Europeans have decided that this is the hill that they will die on. They haven’t shown too much interest in preserving an innovative tech market or enhancing global digital trade flows in the past due to heightened concerns about privacy, and there’s no reason to think they will back down now with a more measured approach. Importantly, as I noted in my earlier essay, “How Attitudes about Risk & Failure Affect Innovation on Either Side of the Atlantic,” this trans-Atlantic clash of vision transcends the debate over privacy law. It’s about broader cultural and political attitudes toward risk-taking and disruption. Most leaders in Europe value stability–both economic and cultural stability–more than US officials and citizens. This tension was always bound to reach a breaking point and the Digital Economy and data handling policies is where the you-know-what is finally hitting the fan.

#3) Web Balkanization accelerates: This is just another blow to the idea of a seamless global Internet. But as tech lawyer Tiffany C. Li pointed out on Twitter this morning in response to the decision, while Web pundits decry balkanization in other contexts, many of them seem to be cheering it on in this case because this decision deals with privacy and data regulation, which they favor more regulation of. But you can’t have your cake and eat it to. Indeed, the great irony of so many “Internet freedom” debates today is that pundits absolutely hate the idea of Internet control and Web balkanization… right up until the point where they absolutely love it! Think of this as the tech policy world’s selective morality problem. (I elaborated on these themes in my essays “When It Comes to Information Control, Everybody Has a Pet Issue & Everyone Will Be Disappointed,” and “Copyright, Privacy, Property Rights & Information Control: Common Themes, Common Challenges.”)

#4) But the big dogs won’t bolt out of Europe: But this should also be another reminder that there are no “John Galt moments” in the world of tech, as some tech libertarians hope. The biggest players won’t pack their bags and head home because there’s still too much money sitting on the table in Europe. Big firms will instead scramble to comply, just as they are trying to do with the so-called Right to Be Forgotten ruling. Of course, this just exacerbates problem #1 already discussed above: The big dogs stay and do their best to comply with the costly regulatory regime while smaller players get crushed by the rules and all the other potential new entrants just stay home.

#5) The decision ignores the real problem: widespread government surveillance: I don’t often find myself agreeing with Cory Doctorow on much, but he gets it exactly right when he notes that, “this doesn’t mean that Europeans won’t be subjected to mass surveillance, including mass surveillance by the NSA.” He elaborates:

If the European Court of Justice wants to end mass surveillance of Europeans, it can only do so by banning mass surveillance — by ruling that laws that treat foreigners’ data as fair game are unconstitutional. If US tech giants want to get loose from a farcical, expensive, and pointless exercise that continues to treat them as adjuncts to the world’s spy agencies, they need to lobby the US government to change the laws under which it treats foreigners as fair game.

Thus, it would certainly be nice if, as CDT suggested in response to the ruling, that the “EU Safe Harbour Ruling Should Reinvigorate Surveillance Reform Efforts.” Of course, that requires that tech companies muster the courage to stand up to public officials here in the States who always want them to (literally) hand over the keys to the kingdom. That’s why the current debate over crypto backdoors is so essential. It’s good to see a number of tech companies pushing back on that front and refusing to get rolled by law enforcement and national security agencies the way that far too many telecom and tech companies have been in the past. Following today’s ECJ ruling, tech companies are realizing just how serious this problem really is because now European officials are striking out against the safe harbor agreement as a surrogate for their general frustrations with US surveillance more generally. Indeed, in a press release following today’s ECJ ruling, the Internet Association, which represents major US tech firms, noted that, “The Internet industry has consistently supported surveillance reform” and the Association pushed for swift congressional action to clarify and limit existing surveillance powers. It remains to be seen whether the US tech sector and other related industries will be able to push back effectively against the growing surveillance state leviathan, but it’s more clear today than ever before why that’s a fight worth having.

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Adam Thierer

Adam Thierer / Senior Fellow in Technology & Innovation at the R Street Institute in Washington, DC. Formerly a senior research fellow at the Mercatus Center at George Mason University, President of the Progress & Freedom Foundation, Director of Telecommunications Studies at the Cato Institute, and a Fellow in Economic Policy at the Heritage Foundation.

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