"I think judgment matters. If you have something that you don't want anyone to know, maybe you shouldn't be doing it in the first place. If you really need that kind of privacy, the reality is that search engines -- including Google -- do retain this information for some time and it's important, for example, that we are all subject in the United States to the Patriot Act and it is possible that all that information could be made available to the authorities."
The quote was in response to a question about to what extent it is wise to trust Google(not a moral question, but a pragmatic one). All of Schmidt's response, except perhaps one sentence("If you have something that you don't want anyone to know, maybe you shouldn't be doing it in the first place.") which is itself ambiguous, is describing pragmatic reasons why Google can not legally protect you from the government. Given that the context of the remark in which "maybe you shouldn't be doing it" either means you shouldn't be doing something you want hidden, or means that you shouldn't be trusting Google with the knowledge that you are doing something that you don't want the government knowing about because they may not be able to keep that information from the government without violating the law, I'm inclined to interpret it as the latter.
With regard to "google v martyr" being a false dichotomy, how could Google not respond to a subpoena for the search data for a certain IP address without suffering legal consequences?
also, your definition of "reasonable" is not one we all need share. there is a trade-off between profit and privacy here - the balance google has chosen is not the only one possible.
so twice you slant your argument to suit google. once by interpreting what was said in as favourable a way as possible, and once by presenting the false dichotomy of "google v martyr".