In this case, the U.S. isn't trying to get Microsoft to coerce their European subsidiary into handing over the data; it's trying to get Microsoft U.S. itself to

In this case, the U.S. isn't trying to get Microsoft to coerce their European subsidiary into handing over the data; it's trying to get Microsoft U.S. itself to hand over the data. The problem for Microsoft is that the parent company in the U.S. has direct access to the data, without having to involve any employees of the European subsidiary, even though the data is stored on European servers. Therefore the U.S. government's position is that a search warrant is valid and not extraterritorial: it's being served on a U.S. company, asking U.S.-based employees to turn over data they have direct access to. Microsoft would be in a stronger position if the data on its EU servers were only accessible by employees of its European subsidiary. Then Microsoft's U.S. branch could respond to a search warrant by truthfully saying that they don't have that data, and the request must be redirected to its European subsidiary. But that would complicate its technical infrastructure, so it would rather not do that. However, if the case turns out adversely, that's one possible response. They could segregate access, so that credentials for access to EU-based data are only given to EU-based Microsoft employees.