The 3rd Circuit Court of Appeals held its ground even after the U.S. Supreme Court ordered a review after its ruling in a related Fox television case. In that case, the high court said the Federal Communications Commission could threaten fines over the use of even a single curse word uttered on live TV.
But Circuit Judge Marjorie Rendell said the Fox case only "fortifies our opinion" that the FCC was wrong to fine CBS over the halftime show.
The three-judge panel reviewed three decades of FCC rulings and concluded the agency was changing its policy, without warning, by fining CBS for fleeting nudity.
"An agency may not apply a policy to penalize conduct that occurred before the policy was announced," Rendell wrote.
CBS argues that the FCC had previously applied the same decency standards to words and images - and excused fleeting instances of both.
Rendell said that long-standing policy appeared to change without notice in March 2004 - a month after the act at the Super Bowl, held in Houston.
The ruling involved rock star Bono's use of profanity on the Golden Globe Awards show the prior year. An FCC enforcement bureau had called it a fleeting, non-sexual utterance and declined to issue a fine. The full commission reversed the ruling in March 2004 but declined to issue a fine because it would have been allowed under the prior standard.
Rendell sees the same issue at play in the Janet Jackson case.
"The same logic implies that the FCC erred in imposing a fine on CBS in this case, as the chronology of events that are the subject of these cases demonstrates," she wrote.
The 3rd Circuit panel had been unanimous in its 2008 ruling. But Judge Anthony Scirica reversed himself after the Supreme Court's Fox ruling, issuing a dissent Wednesday that said CBS could be fined if the FCC finds the network knew about the alleged stunt.
The FCC argues that Jackson's choreographer had suggested that something might be up. During the act, Justin Timberlake ripped off Jackson's bustier, exposing her breast for nine-sixteenths of a second. It was explained away as a "wardrobe malfunction," a term that has since become part of the lexicon.
"There were considerable alarm bells about deviating from the script," FCC lawyer Jacob Lewis argued before the 3rd Circuit last year. "CBS had a duty to investigate."
The panel ruled in 2008 that the FCC had "arbitrarily and capriciously departed from its prior policy," and reached the same conclusion Wednesday.
The Media Access Project, a coalition of producers, writers and directors that filed an amicus brief in support of CBS, said the ruling is less critical to the industry as a whole than it was in 2008.
"It was a big fine for CBS, so that matters, but because the Supreme Court is looking at the constitutionality of the FCC policy itself, this ruling is much less significant than it was ... the first time they ruled," said Andrew Jay Schwartzman, senior vice president and policy director.
Associated Press writer Randy Pennell contributed to this report.