The US Federal Communications Commission (FCC) levied the fine against CBS in 2006 for breaking indecency rules during a halftime performance by Jackson at the 2004 Super Bowl, the championship game of the National Football League.
CBS appealed the fine and the "wardrobe malfunction" case has wound its way through the courts since then.
Two years ago, US Supreme Court ordered the 3rd US Circuit Court of Appeals in Philadelphia to re-examine its verdict in favour of CBS which nullified the fine.
In its ruling on Wednesday, the appeals court again came down in favour of CBS, saying the FCC had acted "arbitrarily" in penalising the TV network.
"CBS cannot be held liable unless it consciously and deliberately broadcast the specific material deemed indecent," the court said.
Jackson, the youngest sister of the late Michael Jackson, was performing live at the Super Bowl when fellow pop star Justin Timberlake tore off her bustier, exposing her breast for a fraction of a second to some 90 million viewers.
CBS apologised for the incident but in 2004 it was ordered to pay the fine, the stiffest penalty the agency could levy against the network.