But in the ruling, Hans-Juergen Papier, the court president, said such software would be unconstitutional.
While Wednesday's ruling was based on a law in the state of North Rhine-Westphalia that had permitted spying online, Papier said the high court's decision would serve as a precedent across the country.
Schaeuble said the authorities would examine the court's decision and alter the proposed legislation accordingly.
"The court's decision must be carefully analysed and will be accounted for as the legislation is modified," he said.
Though Schaeuble has prominently backed the legislation, it has been criticised by opposition parties and civil liberties groups, as well as by Brigitte Zypries, Germany's justice minister.
Under existing legislation, the German authorities can confiscate a suspect's computer as part of an investigation, but security officials argue that they need the right to spy on a suspect's activity online in order to effectively fight crime in the internet age.