According to court documents released in the case, Microsoft said it was challenging an order from a US magistrate to hand over email data in a criminal investigation from its servers located in Ireland.
A Microsoft legal brief filed Friday says the US government "takes the extraordinary position that merely by serving a warrant on any US-based email provider, it had the right to obtain the private emails of any subscriber, no matter where in the world the data may be located, and without the knowledge and consent of the subscriber or the relevant foreign government."
The email in question was an account of a Microsoft customer in Dublin, Ireland. But the suit makes clear it could apply to all Hotmail. By extension, US companies other than Microsoft could be served with such notices, including Google and Yahoo.
The Microsoft case comes amid growing concerns about vast US surveillance programs in light of revelations in documents leaked by former National Security Agency contractor Edward Snowden.
The Snowden revelations have fueled efforts in some countries to require US tech firms to hold data within the country where it is generated, a move many firms say is impractical.
Earlier this year, Microsoft lawyer David Howard said the US tech giant was challenging the warrant.
"A US prosecutor cannot obtain a US warrant to search someone’s home located in another country, just as another country's prosecutor cannot obtain a court order in her home country to conduct a search in the United States," he said in an April blog post.
US telecom giant Verizon filed a brief in support of Microsoft, claiming it has "a substantial interest in judicial interpretations of the Stored Communications Act" which is at issue.
"While Verizon complies with lawful government demands for information, the extraordinary reach of the demand here raises serious questions about its legitimacy," Verizon said in its brief dated Tuesday.
Verizon said the court order, if upheld, would give "extraordinary and unprecedented" powers to US authorities and "would have an enormous detrimental impact on the international business of American companies, on international relations, and on privacy."
"If the government's position in this case were adopted, the US government also could require foreign-based companies with a presence in the US to turn over customer data stored abroad," Verizon said.
"Similarly, applying the same principles, foreign governments could force any companies doing business in their territory to disclose customer data stored outside that territory, regardless of where the companies are based."
The brief released by Microsoft was redacted to remove certain information. The Washington Post, which reported on the case Wednesday, said it involved an investigation into drug trafficking.