Understanding the CLOUD Act’s Expansive Reach

Skadden, Arps, Slate, Meagher & Flom LLP

William Ridgway

As global businesses move more of their data to the cloud, they may unwittingly be placing their sensitive information within the U.S. government’s reach. The reason lies with a single phrase from the Clarifying Lawful Overseas Use of Data (CLOUD) Act and its unexpected application to the cloud industry.

Most regard the CLOUD Act, which went into effect in March 2018, as Congress’ response to the battle Microsoft waged against the U.S. government over whether it needed to comply with a search warrant that sought emails stored overseas. But the act itself has implications far beyond those raised in the Microsoft litigation. All email and cloud storage providers with U.S.-based operations now must disclose emails and other stored data within their “possession, custody, or control,” regardless of whether the data is stored in the U.S. or abroad.1

That provision in the CLOUD Act creates new and challenging questions for businesses that store data overseas with cloud providers. First, what type of ties to the U.S. will render overseas cloud providers subject to legal process under the CLOUD Act? Second, what happens when producing the data sought by the U.S. government violates the laws of the country where the data is stored?

Courts have not yet wrestled with these questions under the CLOUD Act, but case law from other legal contexts shed light on how U.S. courts will handle these questions.

What Ties Put Cloud-Based Data Under the ‘Control’ of a US-Based Provider?

The CLOUD Act made clear that overseas storage does not put data beyond the reach of the U.S. government, so long as the data is within a U.S. provider’s “possession, custody, or control.” That language mirrors the standard for subpoenas in the civil discovery context under Federal Rules of Civil Procedure 34 and 45, so courts will likely look to that case law in interpreting the act. While “possession” and “custody” are straightforward inquiries, determining whether overseas data is within a U.S. provider’s “control” is far more complicated given the interconnectedness of the cloud industry at both the corporate and technical level. Not only do many major cloud providers operate within a network of corporate entities around the globe, they also often sublease services and infrastructure among one another, creating a complicated web that leaves the question of “control” uncertain.

Suppose, for example, a German business stores data with a cloud provider in Germany, but that provider uses the infrastructure of a U.S. provider to back up its data in Germany. If the U.S. government serves the U.S. provider with a search warrant under the CLOUD Act for data held in Germany, courts may be faced with a difficult question about “control.” They will likely consider whether the U.S. provider has technical access to the data in an unencrypted format, whether the U.S. company accesses that data in the ordinary course of its business and whether the two companies otherwise have close corporate and financial ties.2

The analysis of “control” is fact-intensive, so no hard-and-fast rules can be drawn from the case law, but the inquiry boils down to whether a U.S. entity has a legal right or practical ability to access the overseas data. The problem for many businesses is that they may not even be aware of a subleasing arrangement or the existence of a sister corporate entity in the U.S.

The analysis of “control” is fact-intensive, so no hard-and-fast rules can be drawn from the case law, but the inquiry boils down to whether a U.S. entity has a legal right or practical ability to access the overseas data. 

Thus, in selecting cloud providers, businesses should investigate the proposed arrangement to determine whether a company with a U.S. presence would have any level of access to its overseas data in an unencrypted format. In particular, businesses should consider using client-side encryption, which gives the client exclusive control over the encryption key for cloud data, a feature many cloud providers offer.

What Happens When Production of Cloud Data Violates Foreign Law?

The CLOUD Act itself touches on this issue by empowering the president to enter into executive agreements to create a framework for the sharing of data between countries and enable providers to try to prevent data productions that would violate the laws of that foreign government.3 Yet no such executive agreements have been reached, and the CLOUD Act does not otherwise resolve the issue of conflicts with foreign law.

Given this gap, to predict how a court may handle a conflict with foreign law, one may look to cases involving so-called Bank of Nova Scotia subpoenas, where the U.S. government seeks to compel a domestic branch of a bank or business to produce records held by the bank or business in a foreign country. In the case from which the name derives, a Canadian bank refused to comply with a grand jury subpoena served on its Miami branch for documents in the Bahamas and the Cayman Islands,4 arguing that compliance would violate Cayman bank secrecy laws. After weighing the respective national interests of the countries and the hardship that inconsistent enforcement would impose on the bank, the court ultimately upheld the enforcement of the subpoena and imposed sanctions against the bank.

Following that authority, U.S. courts will likely consider conflicting foreign privacy laws in deciding whether to enforce CLOUD Act legal process, but businesses and their providers should not rely on that conflict to shield sensitive data from the reach of the U.S. government.

* * *

By applying the concept of “control” to an interconnected market such as the cloud industry, the CLOUD Act effectively reaches more overseas data than most businesses appreciate. Yet the act’s reach may be managed by thoughtful arrangements with providers, a factor that businesses should consider as they continue moving their data to the cloud.

___________________

1 18 U.S.C. § 2713.

2 Cf. Afros S.P.A. v. Krauss-Maffei Corp., 113 F.R.D. 127, 129–30 (D. Del. 1986).

3 18 U.S.C. § 2703(h).

4 See In re Grand Jury Proceedings Bank of Nova Scotia, 740 F.2d 817 (11th Cir. 1984).

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.
BACK TO TOP