The Appellate Division of the state Supreme Court -- New York's trial-level court -- said the complaint "must be dismissed in its entirety."
The five-judge panel ruled unanimously that a lower court "erred in declining to dismiss Rather's breach of contract claim against CBS."
The court said there was no breach of contract, because CBS still paid Rather his $6 million annual salary after the disputed 2004 broadcast under the "pay or play" provision of his contract.
Rather's lawyer, Martin Gold, said he was "extremely disappointed" in the decision and would appeal it to the Court of Appeals, New York's highest court.
CBS said in a statement it was pleased with Tuesday's ruling.
"The lawsuit is now effectively over," CBS said.
The dispute began with a piece Rather narrated for the now-defunct "60 Minutes II," in which he reported that Bush got preferential treatment during his Vietnam War-era service in the Texas Air National Guard.
Rather cited new documents CBS had obtained, but the authenticity of the documents later came under attack.
Rather kept reporting for "60 Minutes" but was dumped by CBS in June 2006 after 44 years with the network.
His 2007 lawsuit claimed fraud and breach of fiduciary duty, as well as breach of contract. A court threw out the fraud and fiduciary duty claims.
CBS said it expects Rather's related lawsuit against CBS chief executive Leslie Moonves and Andrew Heyward, former head of CBS News, to be dismissed, as well.
General counsel Louis Briskman said that action "is technically still pending, but it's hanging by a thread."
Rather, 77, now produces an hourlong news program for cable channel HDNet.
QUICK HEADLINES | MORE ENTERTAINMENT | GET NEWS ALERTS
-----------------------------------------------------------------------------------------------
ABC13 SOCIAL NETWORKING
Find us on Facebook® | Follow us on Twitter | More social networking
-----------------------------------------------------------------------------------------------
MORE FROM ABC13
ABC13 widget | Most popular stories |
Street-level weather
What's on TV |
Slideshow archive |
Celebrity blog
-----------------------------------------------------------------------------------------------
