Court to rule on data held abroad

WASHINGTON — The Supreme Court on Monday agreed to decide whether federal prosecutors can force technology companies to turn over data stored outside the United States, and whether merchants can steer credit card customers away from using American Express.

The technology case arose from a federal drug investigation. Prosecutors sought the emails of a suspect that were stored in a Microsoft data center in Dublin, Ireland. They said they were entitled to the emails because Microsoft is based in the United States.

Disputes between leading tech companies and the Justice Department have become increasingly common, and the case will give the Supreme Court an opportunity to weigh

in on the clash between the demands of law enforcement and the companies’ desire to shield the information they collect to protect their customers’ privacy.

A federal magistrate judge in New York in 2013 granted the government’s request to issue a warrant for the data under a 1986 federal law, the Stored Communications Act. Microsoft challenged the warrant in 2014, arguing that prosecutors could not force it to hand over its customer’s emails stored abroad.

A three-judge panel of the Second U.S. Circuit Court of Appeals, in Manhattan, ruled that the warrant in the case could not be used to obtain evidence beyond the nation’s borders because the 1986 law did not apply extraterritorially. In a concurring opinion, Judge Gerard Lynch said the question was a close one, and he urged Congress to revise the 1986 law, which he said was badly outdated.

The government asked the full Second Circuit to rehear the case, but the court deadlocked 4-4. In dissent, Judge José Cabranes wrote that the panel’s decision had restricted an investigative tool used thousands of times a year while failing to “serve any serious, legitimate, or substantial privacy interest.”

In urging the Supreme Court to hear the case, the Justice Department said nothing should turn on Microsoft’s business decision to store data abroad that it “can access domestically with the click of a computer mouse.” The panel’s ruling, the department’s brief said, “is causing immediate, grave and ongoing harm to public safety, national security and the enforcement of our laws.”

“Hundreds if not thousands of investigations of crimes — ranging from terrorism, to child pornography, to fraud — are being or will be hampered by the government’s inability to obtain electronic evidence,” the brief said.

In response, Microsoft told the justices that it is up to Congress to revise the 1986 law and noted that both houses have recently held hearings to consider overhauls.

A ruling upholding the warrant, the company warned, would embolden foreign countries to seek the emails of Americans stored in the United States.

Microsoft added that the Justice Department’s position posed a threat to technology companies by requiring them to choose between complying with a warrant and disobeying foreign laws.

“These conflicts can place U.S. companies in the untenable position of being forced to violate foreign privacy laws to comply with U.S. warrants,” the company’s brief said. “And the growing privacy concerns of customers around the world mean that granting U.S. lawenforcement agencies that broad authority would hamstring U.S. companies’ ability to compete in the multibillion-dollar cloud computing industry.”

The case is part of the broader clash between the technology industry and the federal government in the digital age. Apple, for instance, battled the FBI over helping investigators break into a locked iPhone that had been used by a gunman in a mass shooting.

Looking at an American Express practice: The court also agreed to decide whether American Express can stop businesses from steering customers toward competing credit cards.

Last year, the Second Circuit ruled that the company had not violated antitrust laws by insisting in its contracts with merchants that they do nothing to encourage patrons to use other cards.

Retailers pay swipe fees when customers use credit cards. American Express charges higher fees than Visa or MasterCard, meaning that merchants have good reason to prefer those other cards.

In 2010, the Justice Department and 17 states sued several credit card companies, saying that their steering practices had violated the antitrust laws. Visa and MasterCard settled, but American Express fought the case.

In 2015, Judge Nicholas Garaufis, of the U.S. District Court in Brooklyn, ruled that contracts forbidding merchants from steering customers toward other forms of payment were an unlawful restraint of trade.

The Second Circuit disagreed, ruling that Garaufis had unduly focused on merchants’ interests “while discounting the interests of cardholders.”

“This approach does not advance overall consumer satisfaction,” Judge Richard Wesley wrote for a unanimous three-judge panel. “Though merchants may desire lower fees, those fees are necessary to maintaining cardholder satisfaction — and if a particular merchant finds that the cost of Amex fees outweighs the benefit it gains by accepting Amex cards, then the merchant can choose to not accept Amex cards.”

Eleven states asked the Supreme Court to hear the case, saying that the appeals court’s decision was at odds with established antitrust principles and affected “an astronomical number of retail transactions in the United States.”

The Justice Department agreed that the Second Circuit had gone astray.

“The court of appeals seriously departed from sound antitrust principles, and its decision leaves in place restraints that thwart price competition in an important sector of the economy and inflate the retail prices paid by all consumers,” the department’s brief said.

The department nonetheless opposed Supreme Court review, saying that the issues in the case deserved further consideration before the justices weighed in.