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Pepper Hamilton Client Alert: Foreign Data Center Subject to Reach of U.S. Government

Friday, August 22, 2014 | By Pepper Hamilton, LLP – A founding member of the EACCNY

Following the July 31, 2014 decision of a New York federal judge in In re Warrant to Search a Certain E-mail Account Controlled and Maintained by Microsoft Corp., 1:13-mj-02814 (SDNY), U.S. companies should be aware that data they control now may be subject to the reach of a warrant issued pursuant to the Stored Communications Act (SCA), 18 U.S.C. §§ 2701 – 2712, even when that data consists of customers’ otherwise private information stored at facilities in foreign nations.

While Microsoft quickly indicated its intention to appeal, the decision already appears to create significant risks for U.S. companies by weakening their ability to protect their customers’ information, abolishing previously recognized distinctions between a company’s own business records and its customers’ private correspondence, and subjecting companies to potential sanctions for violating privacy laws of the countries in which they locate their data centers.

This matter began with an application by the United States for a “search and seizure warrant” targeting a specific e-mail account provided by Microsoft, and used by a person who is the subject of a government narcotics investigation. Magistrate Judge James C. Francis IV issued the warrant, after which Microsoft undertook to locate the data associated with the account. Microsoft determined that there were two buckets of data related to the account, one stored in the United States and the other in Ireland. The “non-content” bucket consisted of information such as the sender and recipient e-mail addresses, and date and time information. Microsoft stored this information in the United States, and produced it in response to the subpoena. The “content” bucket of information included the substance of the e-mails and their subject lines. For this particular user, Microsoft stored this information at a data center operated by a Microsoft subsidiary in Dublin, Ireland. Microsoft did not produce this information and instead moved to quash the warrant to the extent that it required information from the Dublin data center. Notably, Microsoft began the practice of using foreign data centers in 2010 to address the problem of “latency” that occurred when the servers were too far away from the user. The Irish data center would serve users that live closer to Ireland than the United States.

Magistrate Judge Francis denied Microsoft’s motion. Based on the SCA’s structure and legislative history, and the anticipated burdens on law enforcement if SCA warrants were limited to information stored in the United States, the magistrate judge found the provider’s “control” of the subject information to be the central issue. The magistrate judge did not consider the information’s geographic location to be a relevant factor in light of precedent (discussed in the parties’ briefing as the Bank of Nova Scotia doctrine) pursuant to which a U.S. company, subject to U.S. jurisdiction, can be compelled by a subpoena to produce the company’s business records stored outside the United States as long as they are within the company’s “possession, custody, or control.”

In objecting to the magistrate judge’s Order, Microsoft argued that (i) SCA warrants are confined to U.S. territory; (ii) interpreting SCA warrants to have extraterritorial reach violates international law and raises troubling foreign policy concerns; (iii) conscripting Microsoft to perform the search (rather than the government) does not remedy an unlawful search and seizure; (iv) the magistrate judge misapplied the Bank of Nova Scotia doctrine, which was based on a case involving a subpoena rather than a warrant, and which involved the business records of the company itself, rather than the private correspondence of a customer of the company; and (v) the government could and should have used its Mutual Legal Assistance Treaty (MLAT) with Ireland to access the information targeted by the warrant.

The government argued in support of the magistrate judge’s opinion, contending that (i) the SCA has no “safe harbor” for data that a U.S. company chooses to store in a foreign nation; (ii) the warrant did not require extraterritorial application because it did not authorize a search and seizure in Ireland; (iii) neither the SCA’s language nor its statutory history limited SCA warrants to information located within U.S. territory; (iv) the content of e-mails is akin to business records that a party can be compelled to produce under the Bank of Nova Scotia doctrine; and (v) policy considerations, such as the difficulty in utilizing treaties to request the information from law enforcement authorities in the countries in which the data centers are located, weighed against limiting SCA warrants to U.S. territory.

The hearing over Microsoft’s objections took place on July 31 before Chief U.S. District Judge for the Southern District of New York Loretta A. Preska. Ruling from the bench, Judge Preska affirmed the magistrate judge’s ruling. According to press accounts of the ruling (see, e.g., Allison Grande, Microsoft Must Cough Up Data Stored Overseas, Judge Rules, Law360 (July 31, 2014)), Judge Preska affirmed the magistrate judge’s opinion because she agreed that the issue was one of control over the information, not the location thereof, and that Congress intended for warrants to reach relevant data regardless of its storage location. As to the Bank of Nova Scotia doctrine, Judge Preska also did not appear to credit the distinction Microsoft drew between the company’s business records and the company’s customers’ private e-mail correspondence.

Besides Microsoft, the court’s ruling has created immediate concerns for U.S. businesses relying on cloud technology, including Apple, Cisco, Verizon, and AT&T, all of whom filed amicus curiae briefs in support of Microsoft’s objections. Pepper Hamilton will monitor the progress of Microsoft’s planned appeal of this decision to the Second Circuit of the United States Court of Appeals, and provide further assessments of how the decisions may impact U.S. companies whose business practices include data storage abroad.

Written by Jan P. Levine , William M. Taylor , and Walter B. Donaldson, II