As far as I can see this particular case is a straightforward search warrant. A court absolutely has the power to compel Microsoft to hand over the keys.

The bigger question is why Microsoft has the recovery feature at all. But honestly I believe Microsoft cares so little about privacy and security that they would do it just to end the "help customers who lose their key" support tickets, with no shady government deal required. I'd want to see something more than speculation to convince me otherwise.