The tobacco industry had urged a federal appeals court late last year to throw out a lower court decision allowing the Justice Department to seek $280 billion from them for allegedly misleading the public about the dangers of smoking.
The federal government brought the lawsuit, now being heard in U.S. District Court, under a civil racketeering statute originally designed to prosecute mobsters.
The U.S. Court of Appeals for the District of Columbia Circuit ruled that the civil RICO statute doesn't allow the government to recover money in the ongoing lower court case because RICO statutes required "forward-looking remedies," while seeking the money was "a remedy aimed at past violations."
CBS News Legal Analyst Andrew Cohen said the ruling doesn't take big tobacco off the hook.
"The Justice Department shot for the moon and ended up short but the lawsuit is still alive and big tobacco still could be in very big trouble if the feds prevail," Cohen said. "The companies won this round, but they still face a long and costly lawsuit and the potential for heavy damages."
Cohen also said the ruling might produce renewed settlement talks since "the feds know they no long hold the heaviest hammer over big tobacco."
Tobacco companies declined immediate comment Friday, saying they were reviewing the court's decision. Justice Department spokeswoman Kimberly Smith also declined comment.
"Today's ruling should not be an excuse to let the tobacco industry off the hook for the wrongful practices that are the basis of this lawsuit, including marketing to children and concealing the health risks and addictiveness of its products," said William V. Corr, executive director of the Campaign for Tobacco-Free Kids.
The industry had argued that the government should have filed its case under criminal RICO laws, which require a higher burden of proof and would have allowed the government to go after money in the case.
But the government argued that judges have the power to impose monetary remedies in civil RICO cases and that the government therefore has the right to go after earnings made through fraud.
U.S. District Judge Gladys Kessler previously agreed with the government but said the industry could appeal her ruling even as the case proceeded in lower court. That trial has been under way since September and is expected to last several more months.
The government has described the $280 billion as an estimate of money the companies earned illegally through fraudulent activities such as marketing to children and denying doing so.
However, the industry says the government failed to distinguish between money earned legally and illegally.
Kessler had said she wanted to sort that out in trial, thereby not promising the government how much it could actually get out of the case.
Kessler can still impose restrictions on the tobacco companies such as limiting marketing or requiring the industry to fund public health campaigns or smoking cessation programs.
The federal case comes six years after the states reached legal settlements with the industry worth $246 billion and aimed at recouping health care costs. Those settlements also imposed restrictions on the industry, such as banning ads on billboards and public transportation.