Image: Microsoft

Microsoft has been found in contempt of court for refusing to hand over foreign data to the U.S. government, despite being told to do so by a U.S. judge.

The software giant has been battling U.S. prosecutors for data held in its Dublin, Ireland datacenter, which it says cannot be accessed or retrieved by a U.S. search warrant.

But prosecutors say that if Microsoft controls the datacenter, anything is fair game for the federal government.

In the latest twist, Microsoft has agreed with the federal government to be held in contempt of court for failing to comply with the judge's wishes. At this stage, the company will not face any repercussions — though, the Obama administration said in a letter filed with a New York court that Microsoft could face penalties in the future.

The contempt of court ruling, however, isn't necessarily a bad thing. A stay was awarded to Microsoft, allowing it to appeal the case, but that was overturned some two weeks ago. By reaching the agreement, it "triggers" Microsoft's bid to appeal the decision formally through the higher courts, sources familiar with the proceedings said.

Why did the U.S. government, which wants the overseas data in the first place, allow Microsoft to refuse to comply? It's anybody's guess.

In a brief comment on Microsoft's own Digital Constitution pages, a site set up to detail the overseas data case, the software giant noted that the company would not face prosecution at this stage.

A full copy of the ruling can be found on Microsoft's dedicated site (PDF).

The case is particularly worrying for foreign users of Microsoft's services — as well as other U.S.-based technology giants.

Realizing the effect on U.S. businesses, other major US technology and telecommunications giants offered a hand in the case. Verizon submitted an amicus brief in Microsoft's support, concerned that its overseas data could also be at risk. Apple, AT&T, and Cisco also threw their weight behind Microsoft.

Pending an appeal of the case, sources at the company say it won't budge unless it has to.

But there's only so far the company can go. If it comes to a handing over the data after exhausting its entire judicial path, and therefore avoiding corporate or executive prosecution, then it will.

For now? The only barrier in preventing an open season on international data from U.S. law enforcement and intelligence agencies is Microsoft sticking to its guns.