The court said the company's response to the spill was "imperfect, however, does not rise (to the level of) fraud."
With its ruling, the court cancels out much of the $1.65 billion in judgments against the company, including funds that were to go to monitoring health problems in the area and damages assigned to cover emotional trauma, The Baltimore Sun reported Wednesday.
The underground leak spewed 26,000 gallons of gasoline into the environment in Jacksonville, Md.
A lower court ruled in 2011 that ExxonMobil was guilty of fraud and ordered the company to compensate victims with $1 billion in punitive damages out of a total award of $1.5 billion.
"The evidence showed that we acted appropriately after the accident and the court has agreed," ExxonMobil spokesman Charlie Engelmann wrote in an email.
"We have apologized to the Jacksonville community and we remain ready to compensate those who were truly damaged by this unfortunate accident. We will continue the cleanup," Engelmann said.
Jacksonville resident Susan Lazzaro said the ruling left the plaintiffs "in a state of shock."
"We absolutely did not expect this. It leaves us with such a sense of defeat because we are still living with this nightmare," she said.