The decision by the U.S. Court of Appeals for the District of Columbia to uphold a lower court ruling comes despite recent attempts by Congress to clear the way for the former hostages to sue Iran for damages.
The hostages were taken captive by Iranian militants in 1979 and held for 444 days at the U.S. embassy in Tehran. They were freed in 1980 under an agreement known as the Algiers Accords, which prohibited lawsuits related to the hostage-taking.
Some former hostages tried to sue Iran in the mid-1980s, but the cases were tossed out of court because Iran, like all nations, enjoys sovereign immunity from lawsuits.
The former hostages and their families filed a new lawsuit in 1998 against the government of Iran seeking $33 billion in damages. The lawsuit was based on anti-terrorism legislation passed in 1996 by Congress that opened the courts to people who believed they were harmed by acts of state-sponsored terrorism.
Since Iran did not contest the suit, the court entered a default judgment in favor of the hostages and moved on to assessing the damages they were due, scheduling testimony.
The State Department tried to get the trial stopped, arguing the deal that ended the hostage crisis, as well as other aspects of international law, meant the federal court could not hear the case.
But the judges heard two days of testimony, during which hostages and their families provided " harrowing accounts" of the time in captivity, the judgment read.
Then, in late 2001, Congress passed two amendments to spending bills that made specific reference to the Iran case. Hostages said the measures meant the lawsuit could go forward.
The appeals court said that nothing in the amendments voided the Algiers Accords, although the court agreed that it was clear that Congress intended to interfere in the case. Language inserted in an accompanying conference report expressing congressional intent does not have the force of law, the ruling says.
"There is thus no clear expression in anything Congress enacted abrogating the Algiers Accords," the ruling says.
"Were this Court empowered to judge by its sense of justice, the heart-breaking accounts of the emotional and physical toll of those 444 days on plaintiffs would be more than sufficient justification for granting all the relief that they request," the ruling read.
"However, this Court is bound to apply the law that Congress has created, according to the rules of interpretation that the Supreme Court has determined."
The federal government has been trying to halt a trend of disputes involving foreign governments or companies showing up in U.S. courts, saying it interferes with the conduct of foreign policy.
In May, the Justice Department filed a friend of the court brief in the Ninth Circuit Court of Appeals, which is considering a lawsuit against Unocal for using slave labor in Burma, or Myanmar.
The suit was brought under the 1789 Alien Tort Provision, which allows federal courts to hear certain cases involving international issues.
The Justice Department complained that the provision has been perverted to allow lawsuits "even when the disputes are wholly between foreign nationals and when the alleged injuries were incurred in a foreign country, often with no connection whatsoever with the United States."
According to Justice, this "raises significant potential for serious
interference with the important foreign policy interests of the United States."