The ruling delivered Tuesday is a victory for broadband and mobile providers who are now free to manage traffic on their networks, which may include favoring service and content providers who pay.
The net neutrality rule, also known as the Open Internet Rule, was passed in 2010 and opposed by Verizon Communication on the grounds that Congress did not authorize the agency to regulate broadband providers.
According to Judge David Tatel, who wrote the decision, the Telecommunications Act of 1996 distinguishes between basic telecom carriers and advanced information providers, making the latter exempt from many regulations.
While the law does allow the FCC to "promulgate rules governing broadband providers' treatment of Internet traffic," the FCC has to act in accordance with Congress.
"Given that the Commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the commission from nonetheless regulating them as such," wrote Tatel.
FCC Chairman Tom Wheeler said in a statement that the agency would explore other avenues to protect consumers and free speech online.
"I am committed to maintaining our networks as engines for economic growth, test beds for innovative services and products, and channels for all forms of speech protected by the First Amendment," Wheeler said.
Supporters of the FCC's neutrality rule took some good away from the decision, noting that the court acknowledged the FCC's powers to create Internet rules.
According to Harold Feld, senior vice president at Public Knowledge, a non-profit public interest group, this could open the door for the FCC to reclassify broadband providers and bring them under rules for common carriers.