The court said the Federal Communications Commission had "arbitrarily and capriciously departed from its prior policy" that excused fleeting broadcast material from actionable indecency violations.
Chief Judge Anthony Scirica said: "Like any agency, the FCC may change its policies without judicial second-guessing. But it cannot change a well-established course of action without supplying notice of and a reasoned explanation for its policy departure."
Jackson's right breast was exposed during the Super Bowl half-time entertainment when her co-performer Justin Timberlake tore off a piece of her costume.
Timberlake later described it as a "wardrobe malfunction" and the incident was dubbed "nipplegate" after the uproar it caused.
The split-second flash surprised the unsuspecting US public and CBS executives and triggered a flood of public complaints.
CBS was fined the maximum of $27,500 for each of its 20 affiliate stations that aired the broadcast.
In yesterday's ruling, the appeal court said that the "FCC cannot impose liability on CBS for the acts of Janet Jackson and Justin Timberlake, independent contractors hired for the limited purposes of the halftime show".
CBS said in a statement: "We are gratified by the court's decision, which we hope will lead the FCC to return to the policy of restrained indecency enforcement it followed for decades.
"This is an important win for the entire broadcasting industry because it recognises that there are rare instances, particularly during live programming, when it may not be possible to block unfortunate fleeting material, despite best efforts."
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