SAN FRANCISCO -- Brewster Kahle, who runs an online library in San Francisco, was appalled when his volunteer lawyers told him in November that the FBI was demanding records of all communications with one of his patrons as part of an investigation of "international terrorism or clandestine intelligence activities."

The FBI document, called a national security letter, told Kahle he could be prosecuted if he discussed the subject with anyone but his lawyers, and allowed him to speak with his attorneys only in person. Kahle said his Internet Archive, which has 500,000 card-holders, doesn't even keep the records the FBI was seeking.

He was allowed to speak publicly Wednesday under a rare settlement in which the FBI agreed to withdraw its letter and lift the gag order. That should show other librarians, and members of the public who receive any of the nearly 50,000 national security letters the government issues each year, that "you can push back on these," Kahle said.

National security letters are subpoenas issued by federal agencies to require businesses and other institutions to produce records of their customers. The agencies do not need court approval for the letters.

A 1986 law initially authorized their use against suspected spies, but the USA Patriot Act, passed after the terrorist attacks of Sept. 11, 2001, allowed agents to seek records of anyone connected to a foreign terrorism or espionage investigation, even if the target is not a suspect.

The Bush administration has increasingly used the letters to sidestep a 1978 law requiring federal agents to get a warrant from a special court, in a secret session, to obtain similar records. A law passed in 2006 bars agents from issuing national security letters to libraries, with some exceptions, and requires regular audits by the Justice Department's inspector general, who has found thousands of cases of misuse of the letters.

A federal judge in New York ruled national security letters unconstitutional in September, saying the gag order violated free speech and interfered with judicial authority. The government has appealed.

Kahle's case is one of only two other instances in which a national security letter has been challenged, his lawyers said Wednesday.

"National security letters allow the FBI to demand extremely sensitive personal information about innocent people, in total secrecy and without meaningful judicial review," said American Civil Liberties Union attorney Melissa Goodman.

"The big question is, How many other improper (letters) have been issued by the FBI and never challenged?" said attorney Marcia Hofmann of the Electronic Frontier Foundation.

FBI spokesman John Miller issued a statement describing national security letters as "indispensable tools" that enable the agency to "gather the basic building blocks for our counterterrorism and counterintelligence investigations." He did not say why the FBI sent one of the letters to the Internet Archive or why it was withdrawn.

The archive, established in 1996 and based at the Presidio, allows users to browse through electronic versions of 200,000 books and 85 billion Web pages. It includes a "Wayback Machine" that offers access to archived versions of Web sites - a feature that federal prosecutors have often used with no restrictions from the library, Kahle said.

Users can browse anonymously, and must register and provide e-mail addresses only if they want to add information or comment in a message board.

So when the FBI demanded the name, address and records of all transactions with a specific patron - whose identity is blacked out in the newly unsealed legal documents - Kahle's lawyers replied by furnishing information already posted on the archive's Web site, and said they were withholding only a few items that were not already public. They declined to describe those items Wednesday.

They also sued in federal court, arguing that national security letters are unconstitutional for the reasons cited by the New York judge, and that the Internet Archive is exempt because California classifies it as a library. The lawyers said they negotiated for four months before the FBI agreed to back off.

Kahle said the settlement is a victory, but not a happy occasion.

Although his lawyers worked for free, he said, the fact that they had to invest tens of thousands of dollars' worth of their time "just so we can be a library is downright depressing."

E-mail Bob Egelko at begelko@sfchronicle.com.

© 2008 The San Francisco Chronicle