Further changes to escape dollar and new line characters in the properties and the updated test script for the fix.

Author: Kaniska244

src/spec-node/dockerCompose.ts

@@ -557,7 +557,7 @@ while sleep 1 & wait $$!; do :; done", "-"${userEntrypoint.map(a => `, ${JSON.st
     init: true` : ''}${user ? `
     user: ${user}` : ''}${Object.keys(env).length ? `
     environment:${Object.keys(env).map(key => `
-      - '${key}=${env[key].replace(/'/g, '\'\'')}'`).join('')}` : ''}${mergedConfig.privileged ? `
+      - '${key}=${env[key].replace(/\n/g, '\\n').replace(/\$/g, '$$$$').replace(/'/g, '\'\'')}'`).join('')}` : ''}${mergedConfig.privileged ? `
     privileged: true` : ''}${capAdd.length ? `
     cap_add:${capAdd.map(cap => `
       - ${cap}`).join('')}` : ''}${securityOpts.length ? `

src/test/cli.up.test.ts

@@ -266,6 +266,40 @@ describe('Dev Containers CLI', function () {
 			await shellExec(`docker rm -f ${containerId}`);
 		});
 
+		it('should follow the correct merge logic for containerEnv using docker compose', async () => {
+			const res = await shellExec(`${cli} up --workspace-folder ${__dirname}/configs/image-containerEnv-issue`);
+			const response = JSON.parse(res.stdout);
+			assert.equal(response.outcome, 'success');
+			const containerId: string = response.containerId;
+			assert.ok(containerId, 'Container id not found.');
+
+			const somePath = await shellExec(`docker exec ${containerId} bash -c 'echo -n $SOME_PATH'`);
+			assert.equal('/tmp/path/doc-ver/loc', somePath.stdout);
+
+			const envWithSpaces = await shellExec(`docker exec ${containerId} bash -c 'echo -n $VAR_WITH_SPACES'`);
+			assert.equal('value with spaces', envWithSpaces.stdout);
+
+			const evalEnvWithCommand = await shellExec(`docker exec ${containerId} bash -c 'eval $ENV_WITH_COMMAND'`);
+			assert.equal('Hello, World!', evalEnvWithCommand.stdout);
+
+			const envWithTestMessage = await shellExec(`docker exec ${containerId} bash -c 'echo -n $Test_Message'`);
+			assert.equal('H"\\n\\ne"\'\'\'llo M:;a/t?h&^iKa%#@!``ni,sk_a-', envWithTestMessage.stdout);			
+
+			const envWithFormat = await shellExec(`docker exec ${containerId} bash -c 'echo -n $ROSCONSOLE_FORMAT'`);
+			assert.equal('[$${severity}] [$${walltime:%Y-%m-%d %H:%M:%S}] [$${node}]: $${message}', envWithFormat.stdout);
+
+			const envWithDoubleQuote = await shellExec(`docker exec ${containerId} bash -c 'echo -n $VAR_WITH_QUOTES_WE_WANT_TO_KEEP'`);
+			assert.equal('value with \"quotes\" we want to keep', envWithDoubleQuote.stdout);
+
+			const envWithDollar = await shellExec(`docker exec ${containerId} bash -c 'echo -n $VAR_WITH_DOLLAR_SIGN'`);
+			assert.equal('value with $dollar sign', envWithDollar.stdout);
+
+			const envWithBackSlash = await shellExec(`docker exec ${containerId} bash -c 'echo -n $VAR_WITH_BACK_SLASH'`);
+			assert.equal('value with \\back slash', envWithBackSlash.stdout);	
+
+			await shellExec(`docker rm -f ${containerId}`);
+		});		
+
 		it('should run with config in subfolder', async () => {
 			const upRes = await shellExec(`${cli} up --workspace-folder ${__dirname}/configs/dockerfile-without-features --config ${__dirname}/configs/dockerfile-without-features/.devcontainer/subfolder/devcontainer.json`);
 			const response = JSON.parse(upRes.stdout);

src/test/configs/image-containerEnv-issue/.devcontainer/devcontainer.json

@@ -0,0 +1,15 @@
+{
+	"dockerComposeFile": "docker-compose.yml",
+	"service": "devcontainerissues",
+	"workspaceFolder": "/workspaces/cli",		
+	"containerEnv": {
+		"SOME_PATH": "/tmp/path/doc-ver/loc",
+		"Test_Message": "H\"\n\ne\"'''llo M:;a/t?h&^iKa%#@!``ni,sk_a-",
+		"ROSCONSOLE_FORMAT": "[$${severity}] [$${walltime:%Y-%m-%d %H:%M:%S}] [$${node}]: $${message}",
+        "VAR_WITH_SPACES": "value with spaces",
+        "VAR_WITH_QUOTES_WE_WANT_TO_KEEP": "value with \"quotes\" we want to keep",
+        "VAR_WITH_DOLLAR_SIGN": "value with $dollar sign",
+        "VAR_WITH_BACK_SLASH": "value with \\back slash",
+        "ENV_WITH_COMMAND": "bash -c 'echo -n \"Hello, World!\"'"		
+	}
+}

src/test/configs/image-containerEnv-issue/.devcontainer/docker-compose.yml

@@ -0,0 +1,12 @@
+services:
+  devcontainerissues:
+    # set this to the premade image generated by running the 'original_container' vsc-original-container-c521b00ea40fee92e585b105d9e4f1699ad8216f18220c1b914451f2eafef3b4
+    image: mcr.microsoft.com/devcontainers/javascript-node:1-22-bookworm
+    volumes:
+      - ../..:/workspaces:cached
+    environment:
+      FOO: b"\n\ta"r
+      Test_Message:  "Hello Max"
+      ROSCONSOLE_FORMAT: "Ros from compose"
+    command: sleep infinity
+