Yahoo refused to comply and lost a subsequent appeal in the Foreign Intelligence Surveillance Court, a secret court that deals with requests by the federal government for surveillance orders and legal issues regarding national security.

The unsealed papers reveal the tactics used by the Bush administration to obtain electronic information, further angering privacy advocates over American surveillance techniques.

The U.S. government threatened Yahoo with a $250,000-per-day fine in 2008 if it did not hand over user data, declassified secret documents reveal.

The American online giant said it had "fought" to declassify 1,500 documents involved in the case which it would post on its official blog. But some parts of the papers remain redacted and Yahoo said it was continuing to push for further documents to be revealed.

"The released documents underscore how we had to fight every step of the way to challenge the U.S. Government's surveillance efforts," Yahoo said on its blog.

Read MoreGive Snowden credit for surveillance debate: Google's Schmidt



Government surveillance has been in the spotlight since former National Security Agency contractor Edward Snowden released a slew of internal documents.

Allegations of ways the U.K. and U.S. have tried to collect data through mobile apps and spied on European leaders have bought the ire of privacy advocates.

"Bullying a company defending the rule of law, penalizing them for standing up for their users rights, then gagging them from speaking out publically is a shameful state of affairs," Eric King, deputy director of Privacy International, told CNBC via email.

"There are many other companies and providers who are being attacked by intelligence agencies and seeing their networks exploited to intercept our private communications."

Read MoreNSA hacks Microsoft error messages: Report



Technology giants have fought requests by the government to aide in surveillance operations. Facebook founder Mark Zuckerberg said he had expressed his "frustration" to President Barack Obama over the spying techniques, while Wikipedia founder Jimmy Wales slammed the government as being "out of control."

Microsoft, Google, Yahoo and Facebook this year began disclosing the data requests they had received from the government in an attempt to show users worried about privacy that they are being transparent. But a lawyer said the implications of the case are far reaching showing the power the government has against corporations.

"In the normal channels of digital communication, people can no longer be sure there is security to any degree whatsoever," David Cook, cybercrime lawyer at Slater and Gordon, told CNBC by phone.

"Where some of these larger tech companies are trying to resist, the strong arm of the U.S. government is forcing them."

Disclosure: CNBC has a content-sharing partnership with Yahoo's finance site.

—By CNBC's Arjun Kharpal



