Passing its verdict the Illinois Supreme Court said the US Federal Trade Commission had specifically allowed tobacco companies to label their products as "light" or "low tar and nicotine.'
As a result, it said Philip Morris - maker of the Marlboro brand of cigarettes - had not improperly misled customers about the health impact of its cigarettes.
Shares in Altria - the parent company of Philip Morris - jumped 5% in Wall Street trade following the ruling.
The decision overturns a $10.1 billion award to a group of smokers who claimed Philip Morris knew when it introduced light cigarettes in 1971 that they were no healthier than regular cigarettes.
They argued that the company hid that information and the fact that light cigarettes actually had a more toxic form of tar.
In the original ruling in March 2003, Madison County Judge Nicholas Byron agreed that Philip Morris misled customers into believing they were buying a less harmful cigarette.
The new ruling from the Illinois Supreme Court has sent the case back to the Madison County court with orders to dismiss the case.
Philip Morris had argued that the case should never have been declared a class-action on behalf of some 1.1 million light cigarette smokers.
It also insisted its cigarettes performed as advertised, saying those advertisements met federal guidelines and never promised lights were less hazardous than other cigarettes.
Smokers who wanted lighter flavor and less tar and nicotine could get that through its light brand, prominent attorney and former Illinois Gov. Jim Thompson argued for Philip Morris.
He saif it wasn't the company's fault if a smoker negated any health benefits by taking deeper puffs or smoking more cigarettes.
Philip Morris also argued the case's class-action status should not have been granted because each person smoked differently and chose particular brands of cigarettes for different reasons.