U.S. District Judge S. James Otero had ruled that Trump's tweet at the center of the case was "rhetorical hyperbole" protected by the First Amendment instead of the defamation alleged.
Daniels, born Stephanie Clifford, alleged that she was threatened in a Las Vegas casino parking lot in 2011 after agreeing to cooperate with a magazine that intended to publish a story on her alleged intimate relationship with Trump in 2006.
Daniels sued over an April 18, 2018, tweet in which Trump said the sketch of a man who allegedly threatened Clifford in 2011 was a "total con job."
"Viewed through the eyes of an objectively reasonable reader, the tweet here reflects Mr. Trump's opinion about the implications of the allegedly similar appearances of Ms. Clifford's ex-husband and the man in the sketch," the three-judge panel ruled Friday.
"Mr. Trump's reference to a 'sketch years later of a nonexistent man' signals that the allegedly defamatory conclusion that followed -- that Ms. Clifford was pulling a 'con job' and 'playing the Fake News Media for Fools' - plainly concerns the similarities between the sketch and the photograph of Ms. Clifford's ex-husband. Because the tweet juxtaposing the two images was displayed immediately below Mr. Trump's tweet, the reader was provided with the information underlying the allegedly defamatory statement and was free to draw his or her own conclusions."
Trump has denied Clifford's allegations about their relationship though Trump's personal lawyer at the time, Michael Cohen, arranged to pay $130,000 to Daniels on Trump's behalf as part of a hush arrangement a month ahead of the 2016 presidential election.