(Bloomberg) -- Microsoft Corp. asked an appeals court to reverse a ruling forcing it to turn over e-mails stored in Ireland, in a closely watched case that could set the terms for data security in the U.S. technology industry.

Internet service providers may have a hard time selling Web-based programs if they can’t keep records stored in foreign countries safe from unilateral U.S. seizures. That’s one reason more than two dozen companies, including Apple Inc. and AT&T Inc., have voiced support for Microsoft in court filings.

A ruling in favor of the government would lead to a “global free-for-all” in which other countries are free to order local companies to turn over data stored in the U.S., said Joshua Rosenkranz, Microsoft’s lawyer.

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“We would go crazy if China did it to us,” Rosenkranz said at the start of the hearing. “This is a matter of national sovereignty.”

Lawyers for the government countered that a ruling for Microsoft would create a loophole in U.S. law to be exploited by fraudsters, hackers and drug traffickers.

Seize Evidence

Microsoft wants the judges to overturn a 2014 decision requiring the company to hand over e-mails of a suspected drug trafficker. The company claims doing so would open the door to foreign countries seeking to seize evidence stored in the U.S. The argument centers around the Electronic Communications Privacy Act of 1986, a law passed before the widespread use of e-mail, instant messages and Internet-based social networks.

“At the core of this case is the protection of personal communications and the reach of U.S. law,” Craig Newman, head of the privacy and data security practice at New York’s Patterson Belknap Webb & Tyler LLP, said before Wednesday’s arguments.

The three judges on the appeals panel in Manhattan are all appointees of President Barack Obama. U.S. District Judge Victor Bolden worked for the American Civil Liberties Union for four years. U.S. Circuit Judge Gerard Lynch, a former U.S. prosecutor, also argued cases in cooperation with the ACLU, which joined a brief supporting Microsoft’s position in the appeal. U.S. Circuit Judge Susan Carney is a former lawyer for the Peace Corps and Yale University.

Obviously Broad

“The implications of what we do here are obviously broad,” said Lynch, who asked most of the questions in the hearing.

Investigators must go through Irish authorities to obtain data located in that country, Microsoft argued. Prosecutors countered that the process for requesting evidence through foreign governments can be time-consuming. U.S. law permits them to get it directly from the companies that choose to store it offshore, the government said.

The government isn’t trying to apply U.S. law outside the country, Assistant U.S. Attorney Justin Anderson argued during the hearing. What matters is where the disclosure takes place, not where the information is physically stored, he said.

Government's Argument

“The government is indifferent to where Microsoft might have to go to obtain these materials,” Anderson said, noting that the company has failed to identify any specific Irish or European laws that would be violated if it complied with the warrant.

U.S. District Judge Loretta Preska last year rejected Microsoft’s arguments against a warrant requiring it to provide investigators with the contents of a customer’s MSN.com e-mail account. The name of the customer and the nation in which the customer lives haven’t been disclosed publicly.

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Lynch said the government’s argument would leave foreign countries free to demand electronic communications stored in the U.S. as long as the disclosure takes place outside the country. In contrast, Microsoft’s argument would allow the company to treat communications as it chooses as long as the information is physically stored outside the U.S.

“Neither one of those is a very happy outcome for the protection of privacy,” Lynch said. “It would be helpful if Congress would engage in that kind of nuanced regulation and we’ll all be holding our breath until they do.”

The judges didn’t say when they will rule on the appeal.

The case is In the Matter of a Warrant to Search a Certain E-Mail Account Controlled and Maintained by Microsoft Corp., 14-02985, U.S. Court of Appeals for the Second Circuit (Manhattan).

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