The 4th U.S. Circuit Court of Appeals, with a 2-1 ruling, threw out a $315,000 judgment against ABC over a 1992 PrimeTime Live story.
Two ABC reporters used false resumes to get jobs at a Food Lion store, then secretly videotaped employees for a story on food-handling practices that accused the grocery chain of selling rat-gnawed cheese and rotting meat.
The report alleged that Food Lion employees ground out-of-date beef along with new beef, bleached rank meat to remove its odor and re-dated products not sold before their expiration date.
The jury that found ABC guilty of fraud under state law awarded the supermarket chain $5.5 million in punitive damages, but that was cut to $315,000 by a federal judge.
Food Lion was also awarded $1,402 in compensatory damages for the cost of hiring the two ABC employees.
Both ABC and Food Lion had appealed.
The award stunned some because it appeared to open a new line of legal attack against the news media and hidden-camera journalism that did not center on the veracity of the story.
The appeals court disagreed with the jury's finding that ABC engaged in a business deception in violation of the North Carolina Unfair and Deceptive Trade Practices Act, or UTPA.
"However, the deception ... did not harm the consuming public. Presumably, ABC intended to benefit the consuming public by letting it know about Food Lion's food handling practices," said the opinion by Judge M. Blaine Michael.
"Moreover, ABC was not competing with Food Lion, and it did not have any actual or potential business relationship with the grocery chain," so the law could not be used in this case, Michael wrote.
A spokeswoman for ABC News did not immediately return a telephone call for comment.
Although Food Lion denied the story's accuracy, it did not go after ABC for libel or slander. Instead, it sued for fraud, trespass and breach of the duty of loyalty, saying undercover reporters lied to get jobs and then wore spy cameras and hidden recorders.
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