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Microsoft Corp. won a major legal battle with the Justice Department Thursday when a federal appeals court ruled that a warrant for a suspect's data doesn't extend to information stored in computers overseas.

The case, closely watched by Silicon Valley firms, comes amid broader tensions between Europe and the U.S. over government access to data residing in the computers of social media firms and other internet companies.

The Second U.S. Circuit Court of Appeals in Manhattan ruled that federal law doesn't give investigators the ability to force Microsoft to produce data stored on a server overseas. The case arose from a 2013 warrant issued by a federal judge in New York for the email contents of a suspect in a drug trafficking probe.

Some of that data happened to reside in Microsoft computers in Ireland, and Microsoft fought the order in court, arguing that it shouldn't be forced to comply with a U.S. court order demanding data held in another country.

Other major firms—including Amazon.com Inc., Verizon Communications Inc., and Cisco Systems Inc.--as well as lobbying groups such as the U.S. Chamber of Commerce and the Software Alliance, filed legal briefs supporting Microsoft.

The case is part of a broader fight between Silicon Valley and Washington over how much authority the government has to force technology companies to help them gather data in investigations. The companies argued that revelations about U.S. spying with the help of telecom companies have heightened foreign sensitivities and placed U.S. firms at a competitive disadvantage abroad.

The Justice Department had argued that because Microsoft is based in the U.S., the government has the authority to get the data even if it is stored elsewhere, and asserted that there is no conflict with Irish or European privacy laws.

In their legal briefs, Justice Department lawyers argued that a Microsoft victory could lead some American customers to claim a foreign country of residence "for the specific purpose of evading the reach of U.S. law enforcement."

A Justice Department spokesman said the agency is disappointed in the decision and reviewing its legal options. A Microsoft spokeswoman declined to comment on the ruling, saying the company's lawyers are still reviewing it.

In past cases, U.S. courts enforced subpoenas issued to banks for business records held abroad, even when foreign law prohibited it. The Second Circuit held in a 1984 ruling that control over records, not their location, is what counts in such cases.

But Microsoft lawyers drew a distinction between business records and emails.

"A bank can be compelled to produce the transaction records from a foreign branch, but not the contents of a customer's safe-deposit box kept there," they wrote in their Second Circuit brief. "A customer's emails are similarly private and secure and not subject to importation."

In the ruling, the appeals court concluded Congress didn't intend the warrant provisions of the Stored Communications Act to apply beyond U.S. borders.

"The focus of those provisions is protection of a user's privacy interests," the judges wrote. "Accordingly, the SCA does not authorize a U.S. court to issue and enforce an SCA warrant against a United States-based service provider for the contents of a customer's electronic communications stored on servers located outside the United States."

Write to Devlin Barrett at devlin.barrett@wsj.com

(END) Dow Jones Newswires

July 14, 2016 12:25 ET (16:25 GMT)

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