The state's highest court ruled 4-3 against a request by prosecutors to stop the case from going to trial again.
The notorious murder case inspired a TV series and a hit movie, both called The Fugitive.
Prosecutors wanted the court to dismiss a lawsuit filed by Sheppard's son, Sam Reese Sheppard, claiming his father was wrongfully imprisoned for the 1954 beating death of his wife Marilyn. The younger Sheppard could collect about $2 million in damages if he wins.
Prosecutors claimed too much evidence had been lost and too many witnesses had died to litigate the case again.
Justice Evelyn Lundberg Stratton, writing for the majority of the court, said the issues raised by prosecutors about old and tainted evidence would be better decided by a trial judge.
"The passage of time does not deprive the trial court of subject matter jurisdiction," Stratton said.
"We won our day in court," said Terry Gilbert, the younger Sheppard's attorney. "It's all we've been looking for the last three years. Justice for the Sheppard family may be in sight."
Even before attorneys had read the state court's ruling, there was talk of an appeal to the U.S. Supreme Court.
"We're just terribly disappointed," said Assistant Cuyahoga County Prosecutor George Sadd. "By the closeness of the vote it's apparent they struggled with the decision."
After reading the ruling, Sadd said, prosecutors will decide whether to "ask for a reconsideration or determine whether to appeal to the U.S. Supreme Court."
If today's ruling stands, the younger Sheppard's lawsuit will go back to Cuyahoga County Common Pleas Court for a trial.
To win a wrongful imprisonment declaration now, Dr. Sheppard would have to be declared innocent by a judge, a stronger statement than the acquittal he won in 1966 at his court-ordered retrial.
The elder Sheppard died of liver failure in 1970 at age 46. To the end of his life, Dr. Sheppard insisted that a bushy-haired intruder beat Mrs. Sheppard to death at the couple's home on Lake Erie and then knocked him unconscious. A Cuyahoga County jury convicted him of murder in 1954.
The U.S. Supreme Court overturned the verdict in 1964, and Sheppard was acquitted at a second trial two years later.
Sam Reese Sheppard and his legal team believe DNA and other evidence indicate Mrs. Sheppard was slain by Richard Eberling, a window-washer for the couple.
Eberling, who died in prison earlier this year while serving time for an unconnected murder, always said publicly that he was innocent of Mrs. Sheppard's killing.
Written By Andrew Welsh-Huggins