WASHINGTON -- Yahoo's free email service could have cost the company an extra quarter of a million dollars a day.
The government called for the huge fine in 2008 if Yahoo (YHOO) didn't go along with an expansion of U.S. surveillance by surrendering online information, a step the company regarded as unconstitutional. At stake, according to the government, was the nation's security.
"International terrorists, and [redacted] in particular, use Yahoo to communicate over the Internet," the director of national intelligence at the time, Mike McConnell, said in a court document supporting the government's position. "Any further delay in Yahoo's compliance could cause great harm to the United States, as vital foreign intelligence information contained in communications to which only Yahoo has access, will go uncollected."
The outlines of Yahoo's secret and ultimately unsuccessful court fight against government surveillance emerged when a federal judge ordered the unsealing of some material about Yahoo's court challenge. Sections of some of the documents were redacted, such as the names of the terrorists McConnell cited.
In a statement Thursday, Yahoo said the government amended a law to demand user information from online services, prompting a challenge in 2007 during the George W. Bush administration.
"Our challenge, and a later appeal in the case, did not succeed," Yahoo general counsel Ron Bell said.
The new material about the case underscores "how we had to fight every step of the way to challenge the U.S. government's surveillance efforts," Bell added. "At one point, the U.S. government threatened the imposition of $250,000 in fines per day if we refused to comply."
Bell said the Foreign Intelligence Surveillance Court upheld the predecessor to Section 702 of the FISA Amendments Act. Section 702 refers to the program called PRISM, which gave the government access to online communications by users of Yahoo.
Former National Security Agency systems analyst Edward Snowden disclosed the program last year.
Yahoo said it is committed to protecting users' data and that it will continue to contest requests and laws that it considers unlawful, unclear or overly broad.
"We consider this an important win for transparency, and hope that these records help promote informed discussion about the relationship between privacy, due process and intelligence gathering," Bell said.
The newly released documents show that the Bush administration was taking a hard line and was miffed that Yahoo had even been allowed to get into court with its complaint.
In sum, the FISA court erred in permitting Yahoo to challenge the directives, said a court brief signed by then-Attorney General Michael Mukasey.
Yahoo was arguing that what the Bush administration was doing violated the Fourth Amendment rights of customers of Yahoo customers.
"The government has conducted warrantless foreign intelligence surveillance for decades, and such surveillance has been upheld under the Fourth Amendment by every appellate court to decide the question," Mukasey wrote.
"The government's implementation of the Protect America Act is consistent with decades of past practice and adequately protects the privacy of U.S. persons," Mukasey said.
In its court papers, Yahoo urged that the government be reined in.
Yahoo requested that the Foreign Intelligence Surveillance Court of Review reverse the lower court's judgment and find that "the surveillance authorized by the directives is not 'otherwise lawful,' " wrote Marc Zwillinger, a lawyer representing the Internet service provider.
Yahoo lost the battle in the surveillance review court.
In a statement late Thursday, the Obama administration said it is "even more protective" of the rights of U.S. citizens than the law upheld by the review court.
The American Civil Liberties Union said the case shows the need for more openness about government surveillance.
"The secrecy that surrounds these court proceedings prevents the public from understanding our surveillance laws," ACLU staff attorney Patrick Toomey said. "Today's release only underscores the need for basic structural reforms to bring transparency to the NSA's surveillance activities."
-AP Technology Writer Michael Liedtke in San Francisco contributed to this report.