Microsoft (NASDAQ:MSFT) just sued the U.S. Department of Justice, claiming that it was "unconstitutional" to force it to remain silent about government-sponsored cloud data searches. In the complaint filed in a Washington District Court, the tech giant declared that "customers have a right to know when the government obtains a warrant to read their emails."
Microsoft also reveals that over the past 18 months, federal courts issued 5,624 demands for customer "information or data". It also noted that the government "issued nearly 2,600 secrecy orders, silencing Microsoft from speaking about warrants" targeting its cloud-based customers. The company admits that "exceptional circumstances" might require it to remain silent during an investigation, but insists that those restrictions must be temporary.
The privacy war escalates ... again
Microsoft first clashed with the U.S. government in 2013 after the Snowden leaks revealed that the NSA was spying on American tech companies and their users. At the time, Microsoft general counsel Brad Smith called the snooping an "advanced persistent threat" -- a term usually reserved for overseas hackers which carry out coordinated cyberattacks.
That same year, the U.S. government requested that Microsoft turn over a user's emails on an Irish server to aid in a drug investigation. Microsoft refused to do so, asking the U.S. government to send the request through EU and Irish authorities. The U.S. refused to do so, and a court ruled that Microsoft had to comply. But Microsoft appealed the case, and still hasn't handed over the emails. Major tech and telecom companies and EU regulators have since expressed their support for Microsoft.
Is Uncle Sam killing U.S. tech?
Microsoft's ongoing battle against the U.S. government strongly resembles Apple's (NASDAQ:AAPL) refusal to unlock iPhones for law enforcement agencies. Apple stated that doing so would violate First Amendment rights, expose users to more hackers, and set a "dangerous precedent" for future investigations of electronic devices.
In both cases, critics have accused law enforcement agencies of treating U.S. tech companies like extensions of the NSA instead of independent multinational companies. Since Microsoft, Apple, and other U.S. tech companies generate a large percentage of their revenue overseas, that perception could hurt enterprise sales in countries which are suspicious of U.S. snooping practices. In 2014, Germany warned that Windows 8 could be exploited as an NSA backdoor, and China completely banned its installation on government computers. Apple stored data on its Chinese users on state-owned China Telecom's servers, presumably to keep it out of the hands of the U.S. government.
That's why Apple, Microsoft, Alphabet's Google, Facebook, and other major tech companies signed an open letter to the Obama administration last year, urging it to stop forcing tech companies to lower encryption standards for the sake of easier law enforcement.
Could U.S. tech companies relocate?
These clashes are damaging the fragile relationship between the U.S. government and its top tech companies. In addition to law enforcement issues, the U.S. government has accused Microsoft, Apple, and other multinational companies of hoarding their cash overseas in low-tax countries like Ireland to avoid paying U.S. corporate taxes.
The companies claim that U.S. corporate taxes, which are the highest in the world, reduce their margins and dull their competitive edge. That's why many companies purchased foreign subsidiaries, moved their headquarters overseas, and ditched their status as American companies to pay lower taxes.
If the U.S. government continues pushing tech companies to turn over user data while keeping corporate tax rates high, more companies could try moving overseas to escape Uncle Sam's grasp. That would likely cause a huge PR backlash and trigger new regulations to prevent U.S. companies from leaving, but the long-term benefits might outweigh those risks.
What investors need to watch
Microsoft's new lawsuit reveals that the U.S. government isn't just using the Stored Communications Act to gain access to data, but that it's also using it to prevent companies from talking to their users or the media. In my opinion, this escalation of hostilities could eventually convince top American companies to leave before the government passes new anti-inversion laws.