So a government agency has used old laws, out of their original context, to force a company (could be a person too,) to create something that every security expert in the world says is a very bad idea.
The UK police often use laws in ways that their originators never envisaged, and in ways specifically denied by parliament. So we have a lot of experience of this type of thing.
IMHO this case should go all the way up to the Supreme Court. Perhaps the US Congress could clarify the law being used.