The U.S. government has a powerful new tool to gain access to data stored overseas – the CLOUD Act, which was enacted this spring. If you are a company based overseas, particularly if you use a cloud service provider with a significant U.S. presence, it just got a lot easier for the U.S. government to get your data, and the data you hold for your customers.^[1]

Background to the CLOUD Act

Since 1986, U.S. law enforcement’s access to electronic data held by private third parties has been regulated by the Electronic Communications Privacy Act (ECPA,18 U.S.C. § 2510 et seq). That law was enacted, in part, to extend government restrictions on wire taps from telephone calls to include transmissions of electronic data by computer and stored electronic communications. These issues are addressed in Title II of ECPA, known as the Stored Communications Act (SCA). While ECPA and the SCA have been amended several times since 1986, their primary provisions have remained the same, meaning that much of American law relating to government access to electronic data held by third parties was in fact drafted several years before email was commonly used and the World Wide Web was even created.

Under the SCA, the government can compel production of “stored wire and electronic communications and transactional records” held by a third party. The standards for mandatory disclosure of data vary depending on the type of data storage provider, whether the data sought is content or non-content (e.g., metadata), and whether advanced notice has been given to the customer. A combination of these factors determines whether the government must obtain a warrant, a subpoena or a specialized court order in order to gain access to the data.

In recent years, one issue has become an increasing source of contention between the government and private companies – the SCA’s extraterritoriality, i.e., the applicability of the SCA to data held overseas by a company located in the U.S. The leading case on this issue was a case in which the U.S. claimed that the SCA required production of data held by a third-party provider overseas, while the company argued that the SCA did not apply extraterritorially.

The case made its way up to the Supreme Court of the United States, where it was argued in February 2018. While the case was still pending before the Supreme Court, Congress adopted the Clarifying Lawful Overseas Use of Data (CLOUD) Act, as part of an omnibus spending bill, which became law on March 23, rendering the case moot.

What the CLOUD Act Means

The key provision of the CLOUD Act amends ECPA by requiring a provider to produce stored electronic data within the provider’s “possession, custody, or control, regardless of whether such communication, record, or other information is located within or outside of the United States.”

The new law not only clarifies that the SCA is extraterritorial and applies to data held outside the U.S., but makes clear that it applies to any information pertaining to a customer or subscriber, not just communications or other limited types of services. Thus, for example, it does not merely apply to emails, but also to general cloud storage.

The CLOUD Act also authorizes the U.S. Government to enter into “executive agreements” with other countries relating to data sharing. These are binding international agreements entered into by the executive branch, which are authorized in advance by Congress through legislation, and therefore, unlike treaties, do not require Congressional ratification. The CLOUD Act authorizes such agreements, among other things, to pave the way for easier access to foreign-held data by the U.S.

To help companies better understand the implications of the CLOUD Act to their data storage practices, here are answers to some common questions.

1. To What Extent Can Foreign Companies Be Subject to the CLOUD Act?

As with all federal statutes, the CLOUD Act can be applied not only to American companies, but also to foreign companies with a presence in the U.S. A U.S. court may exercise jurisdiction over a person or company where that entity has minimum contacts with the particular state in which the court sits. These contacts may take a variety of forms, including the commission of some act within the state, contracting for the provision of goods or services within the state, or deriving some benefit from conducting business within the state. Additional examples may include the ownership of property, maintaining a bank account, or placing an item in the stream of commerce with the intention that it be distributed within the state.

Even if such minimum contacts with a particular state cannot be established, a federal court may gain jurisdiction over a foreign company, if to do so does not violate the requirements of due process contained in the Constitution’s Fifth Amendment. In other words, if a service provider has any significant presence in the U.S., it could be subject to the CLOUD Act.

2. How Does “Possession, Custody or Control” Work in the Context of Corporate Subsidiaries and Related Entities?

As noted, the CLOUD Act relates to data that is in the “possession, custody or control” of an entity. In utilizing the term “possession, custody or control” in the Act, Congress turned to a phrase that has been in Anglo-American law for centuries, and has been included in the U.S. Federal Rules of Civil Procedure since 1937.

When looking at whether companies exercise “possession, custody or control” over information, courts look to the degree of ownership and control a corporation exercises over a related entity, whether the two companies operate as one, whether they have common policies, whether one company has access to documents from the other in the ordinary course of business, whether there is an agency relationship, and any overlap in the executives of the two companies. For example, where a parent has little involvement in the daily operations of the subsidiary, does not receive financial statements, does not share employees or an office with the subsidiary, and rarely accesses documents from the subsidiary, and does not have the “legal right, authority or ability” to obtain documents from the subsidiary, a court has found no possession, custody or control.

3. Can An Extraterritorial Demand for Data under the Act be Challenged?

The CLOUD Act explicitly authorizes a provider to file a motion to quash or modify a data demand within 14 days of receipt. Under this provision, a provider may file a motion to quash or modify a data demand if:

• The provider reasonably believes the target of the demand is not a U.S. person and does not reside in the U.S.;
• The provider reasonably believes disclosure would create a material risk of violating a foreign nation’s law; and
• The foreign nation whose law may be violated has an executive agreement with the U.S. authorized by the CLOUD Act.

If those conditions are present, a court will entertain a challenge to the data demand. In order to approve this challenge, the court must find that three conditions are met:

• The required disclosure would violate foreign law;
• The interests of justice dictate that the demand should be quashed or changed; and
• The target is not a U.S. person and does not reside in the United States.

In essence, this is a streamlined comity analysis that permits companies resident in countries that have executed an executive agreement with the U.S. to resist disclosure of data if that disclosure would violate their own laws, in certain circumstances.

4. What If There Is No Executive Agreement in Place?

Countries have not yet signed executive agreements with the U.S., raising the question: Can a data demand be challenged absent such an agreement?

The answer is yes, but it is more difficult. First, such challenges will require a company to refuse to comply with an order and then litigate the issue in the context of a finding of contempt. Second, in such cases courts will have to rely on the traditional, vaguer common law principles of comity, not the streamlined ones set forth in the Act.

5. Who May Bring the Challenge?

The provision of the CLOUD Act that provides for challenges to data demands where an executive agreement is in place limits the right to bring such challenges to the “provider” of the data service.

However, as noted above, the law also preserves “the common law standards governing the availability or application of comity analysis to other types of compulsory process or to instances of compulsory process issued under” the SCA and CLOUD Act. Therefore, it may be possible for a subscriber or “middle man” (such as a bank storing its customers’ data) to bring a traditional comity action, but only if it is aware of the demand in the first place.

6. Are the Data Demands Themselves Confidential?

The default status of data demands is that they are not confidential. However, the government can prevent disclosure to the subscriber by obtaining a warrant or, if using a subpoena or general court order, obtaining a 90-day delay in notification, if there is reason to believe that notification would result in:

• Endangering an individual’s physical safety;
• Flight from prosecution;
• Destruction of or tampering with evidence;
• Intimidation of potential witnesses; or
• Otherwise seriously jeopardizing an investigation or unduly delaying a trial.

7. What Types of Data Are Typically Demanded?

Most reported data demand cases under the SCA involve efforts by the government to obtain emails or other communications (or data about those communications) relating to individuals. The typical demand will seek information about emails within certain date and subject parameters relating to the activities of particular individuals, in those individuals’ accounts. A typical case is a warrant for the following information regarding a single individual:

• the contents of all e-mails stored in the user’s account;
• all records or other information regarding the identity of the user (such as name, address, phone number etc.);
• all records or information stored in the account including address books, contact lists, pictures, and files; and finally
• all records of communication between the user and the provider

The targeted individuals are typically being investigated for crimes such as fraud, cyber hacking, or theft of trade secrets.

In addition, based on so-called transparency reports published by ISPs:

• Most data demands do not require the production of the content of communications; rather, they demand non-content information such as date/time information or other metadata.
• Stored content (as opposed to non-content information) will generally only be provided in response to a court-ordered warrant, rather than a subpoena or general order.
• The number of data demands consisting of subpoenas (which don’t require court action but are more difficult to protect from disclosure to the customer) far outweighs the number of court orders and warrants.

8. Does Passage of the CLOUD Act mean a substantive expansion of SCA data demands, not just a territorial expansion?

To date, the primary use of the SCA to compel production of data to law enforcement has related to communications, specifically email. However, it seems likely that use of the SCA to obtain non-communication data will escalate in the coming months and years. Indeed, the acronymic title given to the new law – the CLOUD Act – seems to predict a broader use of that power in the future, as does the reference to “any record or other information” in the extraterritoriality provision of the CLOUD Act. It is therefore important for companies storing data offsite and overseas to be evaluating the risks posed by the new law.

Conclusion

The CLOUD Act is still brand new, so little if any law has yet been created construing it. However, its passage likely signals both territorial and substantive expansion of the U.S. law enforcement’s power to obtain data held overseas in storage by third parties such as cloud providers. Companies would be well advised to consider their cloud and email storage policies in light of this new development.

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_{[1] This white paper is meant to give a general summary of provisions and effects of the CLOUD Act, and does not provide legal advice. It does not cover all aspects of the Act and all of its details. Before taking action in response to the CLOUD Act, companies should seek legal counsel regarding their specific circumstances as related to the provisions of the Act.}