Microsoft has reached a deal with the US government in which it will agree to be held in contempt of court in order to move an e-mail privacy case on to appeal.

The case is over a government demand for e-mails stored on a Microsoft server in Dublin, Ireland, that are related to an investigation into narcotics trafficking.

The Obama administration has said that the company must comply with valid warrants for data, even when the data is held overseas. Microsoft say that's wrong and that the ability to enforce US law stops at the nation's borders.

It's a case with big implications, but it got mired down in procedural confusion after US District Judge Loretta Preska sided with the government. Microsoft stated that it would still not hand over the e-mail and would continue to an appeals court; the government said that if Microsoft wanted to do that, it should be held in contempt.

"Everyone agrees this case can and will proceed to the appeals court," Microsoft said in a statement last week. "This is simply about finding the appropriate procedure for that to happen."

As of yesterday, the procedural disagreement appears to be resolved. Microsoft and the Department of Justice agreed to a deal in which it would be held in contempt, but not be punished in any way—for now. The government said it "reserves its right to seek sanctions" if the situation changes.

The full stipulation (PDF) reads:

1. Microsoft has not fully complied with the warrant, and Microsoft does not intend to comply while it in good faith seeks further review of this Court's July 31 decision rejecting Microsoft's challenge to the Warrant.

2. While Microsoft continues to believe that a contempt order is not required to perfect an appeal, it agrees that the entry of an order of contempt would eliminate any jurisdictional issues on appeal. Thus, while reserving its rights to appeal any contempt order and the underlying July 31 ruling, Microsoft concurs with the Government that entry of such an order will avoid delays and facilitate a prompt appeal in this case.

3. The parties further agree that contempt sanctions need not be imposed at this time. The Government, however, reserves its right to seek sanctions, in addition to the contempt order, in the case of (a) materially changed circumstances in the underlying investigation, or (b) the Second Circuit's issuance of the mandate in the appeal, if this Court's order is affirmed and Microsoft continues not to comply with it.

The agreement was submitted to the judge on Thursday and signed yesterday.