Microsoft sued the Justice Department. I'm not a lawyer, but since the Justice Department is no longer doing this thing, they may not have any standing for the lawsuit. I don't think they can force the lawsuit through to get a decision since they're no longer being harmed by it.

It wouldn't be the first time someone who thought they might lose backed down to avoid setting a precedent. Police departments did it with cases where people challenged the use of Stingrays, for example.

Likely because the government is a large enterprise customer who needs to not have a judicial precedent set.

I.E. This seems a lawfare move to step back general gag use, so that they can step forward again in specific gag use, rather than risk losing and finding future gags severely restricted. Microsoft is being polite because sometimes it might be reasonable for government to gag a subpoena, without it being a national security issue.