The law's long reach is on a collision course for the first time with Canadian privacy legislation, and the clash could cost US firms millions of dollars in lost business.
The Act permits the US Federal Bureau of Investigation to demand companies secretly turn over information that may be relevant to their investigations.
But the government employees union in British Columbia, Canada's western-most province, believes those powers could be used to access private details of Canadians held in databases managed by American companies or Canadian subsidiaries.
That would contravene Canadian privacy laws that strictly regulate access and disclosure of private information.
"We've never been up against anything like this," said Mary Carlson, director of policy and compliance for the British Columbia Information and Privacy Commissioners office.
"There is a real concern here and until this is ironed out, no privatisation should proceed and anything to do with personal information should remain in government hands"
The province's Government and Service Employees' Union is suing the government to stop the planned outsourcing of the province's publicly-funded health plan administration to one of two American companies IBM and Maximus.
The complaint cites a legal opinion obtained from the American Civil Liberties Union (ACLU) which states private information on Canadians could end up in the hands of the FBI.
Health plan records include health and mental health records, drug prescriptions, and in some cases social benefits or criminal records, said Union President George Heyman.
"There is a real concern here and until this is ironed out, no privatisation should proceed and anything to do with personal information should remain in government hands," he said.
The case has prompted a countrywide review of government outsourcing, which has risen in the past decade to cut costs, as well as closer scrutiny of government contracts to determine the extent of their possible exposure.
'Far reaching consequences'
But the provincial government is downplaying its impact, suggesting it may be able to tweak contracts to safeguard citizens' information. However it concedes that if the union accusations are true, the consequences would be far reaching.
The Canada/US border is the
world's largest unproteced border
US firms could be barred from bidding on Canadian government contracts, though this outcome is not likely achievable under the North American Free Trade Agreement (NAFTA).
Alternately, provincial governments across Canada could be forced to rethink their outsourcing plans and cancel thousands of contracts already awarded - which would amount to a blow worth millions of dollars to US firms.
"We're seeking the best possible legal advice and we'll act on it. We will make sure that information is protected," said Joyce Murray, the British Columbia minister charged with overseeing government outsourcing.
If that means reviewing contracts that have already been negotiated or that are under negotiation, we'll do that," said Murray.
The ACLU challenged the act on constitutional grounds last summer, but a decision on the case is still pending.
The act was supposed to expire next year, but US President George Bush recently proposed extending it and parts of it are showing up in other American legislation, said ACLU legal counsel Timothy Edgar in Washington DC.