He told journalists at this week's AWS re:Invent conference that the best way to protect data from state access was to encrypt it with keys that stay under the user's control.
Schmidt expressed hope that the proposed Australian legislation reflects a desire to not do anything that would harm security.
"It is possible to do the right thing at the right time," he said, but it is a bad idea to deliberately introduce vulnerabilities into a system as "that will put us all at risk".
In that case, AWS would take them to court, he said, arguing that the potential harm resulting from bad actors taking advantage of the vulnerability would outweigh any benefit of access by government.
Schmidt also pointed out that AWS is contractually obliged to alert customers to such activity. However, legislation can be written to prohibit such disclosures.
iTWire is providing extensive coverage of the progress of the encryption bill.
Disclosure: The writer attended AWS re:Invent as a guest of the company.