More fines to come in Germany? Service provider engagements are under increased scrutiny.

Following a significant fine against the parties to an asset acquisition for illegally transferring customer information, the Bavarian Data Protection Supervisory Authority (Bavarian DPA) announced on August 20, 2015 that it has fined a company that engaged a service provider based on a data processing agreement which did not meet the requirements of Section 11 of the German Federal Data Protection Act (FDPA). The technical and organizational measures of the service provider were not specified as required by Section 11 of the FDPA.

Background

Since 2009, companies that engage service providers to process personal data must enter into a very specific data processing agreement. The FDPA sets forth various required provisions to be included in such an agreement. For example, the parties must agree that data processing operations will comply with the customer's (data controller's) instructions, that the customer will have audit rights that the processor will abide by, and that the processor must implement technical and organizational data security measures (TOMs) which must be specified in that agreement.

In practice, the foregoing requirements are often not followed in data processing agreements for several reasons:

• Service providers often deliver services globally pursuant to a standard format and master services agreement in order to save costs and to keep processes as operationally simple as possible. Service providers naturally dislike the legal concept of EU data privacy law according to which they must follow orders from their customers and where they lose flexibility as regards their TOMs.
• Service providers often entirely refuse to agree to FDPA compliant data processing agreements or they provide for a description of TOMs which is insufficient from the FDPAs perspective. For example, TOMs are described too broadly, or sometimes, the description of the TOMs merely paraphrases the text of the law.
• Because customers – as the data controllers – bear the burden of demonstrating compliance with the FDPA (and the burdens of enforcement penalties), service providers are less incentivized to proactively design and deliver their services and agreements pursuant to FDPA requirements.   

The Bavarian DPA has now issued a five-digit fine against a company that engaged a service provider without a data processing agreement that sufficiently specified the TOMs. This is a fairly new development since in the past, fines were often either not issued at all or issued only in case where there was no data processing agreement at all.

Outlook

Companies who are subject to German data privacy law, should put more focus on ensuring that the data processing agreements concluded with service providers fulfill all the requirements of the FDPA. They cannot avoid fines by merely arguing that the service provider was unwilling to enter into such an agreement. Indeed, companies must be willing to negotiate aggressively or, unfortunately, consider terminating negotiations should service providers fail to accommodate German legal requirements.

Service providers who are active in the German market should be thoughtful in further customizing their offerings from standard data processing agreements so that they may evolve with the developing enforcement regime. This will help the service providers prevent unnecessary back-and-forth negotiations with their German customers and will, in the end, increase their ability to compete in the German market.