The 9th U.S. Circuit Court of Appeals denied an injunction request made by business groups that are challenging the law and appealing a lower court's decision that upheld the law. The groups sought to block the law while their case was under appeal.
"This removes what may have been a potential obstacle," said Roger Hall, an attorney representing 10 of Arizona's 15 county prosecutors in the case.
The law, intended to weaken the economic incentive for immigrants to sneak across the border, took effect Jan. 1 but prosecutors agreed to not file any cases before March 1 to allow enough time for lawyers to file appeals.
It prohibits businesses from knowingly hiring illegal immigrants and suspends or revokes business license penalties for violators.
Thursday's decision was the latest in a steady stream of setbacks dealt to the business groups in federal courts, where the challenge was filed.
Julie Pace, an attorney for groups, said it was possible that employers who face enforcement cases could file challenges to specific elements of the law in state court, such as whether it applies to only new hires or all workers on the payroll.
A decision from the federal appeals court could come by late summer or early fall, Pace said.
Opponents of the law said the new rules will burden employers, poison Arizona's business climate and that cracking down on such hirings is the sole responsibility of the federal government.
Supporters said state punishments were needed because the federal government hasn't adequately enforced a federal law that already prohibits employers from knowingly hiring illegal immigrants.