Sender Email address with Apostrophe gives 550 Requested action not taken: mailbox unavailable

This was another fun one because there were no logs on the Exchange server to show it ever saw the message and my spam filtering service was passing the email and saying my Exchange 2010 server was responding with:

550 Requested action not taken: mailbox unavailable (in reply to MAIL FROM command)

The senders email address was like this first.o'last@domain.com which is technically a valid address but I frequently see admins remove the apostrophe to avoid complications.

I finally figured out that yes this error was happening where I suspected on our WatchGuard firewall. For some reason their SMTP proxy disallows this character by default even though it is valid. To fix:

• Open WatchGuard System Manager then Policy Manager. Right click the SMTP-proxy rule then select Modify Policy option.
• lick the View/Edit Proxy button in the right side of Proxy action field.
• (Fix Sender) Mail From of the SMTP-proxy, click Change View button to switch to Advanced View. Click Edit button to edit the Non-allowed characters rule.
• Add the apostrophe at the end of default Regular Expression then click OK.
  Change from [^-_.+=%*/~!&@?0-9a-zA-Z] to [^-_.+=%*/~!&@?0-9a-zA-Z']
• (Fix recipient) Rcpt To of the SMTP-proxy, click Change View button to switch to Advanced View. Click Edit button to edit the Non-allowed characters rule.
• Add the apostrophe at the end of default Regular Expression then click OK.
  Change from [^-_.+=%*/~!&@?0-9a-zA-Z] to [^-_.+=%*/~!&@?0-9a-zA-Z']
• To enable save the config to the device.