US computer programmer Andrew Bunner, 26, had posted a code online that broke its the DVD Copy Control Association's Content Scramble System (CSS).
But the organisation which represents Hollywood studios, said it controlled the encryption system which scrambles information to prevent the copying of movie DVDs.
The association sued Mr Bunner under California's Uniform Trade Secrets Act, saying he was spreading industry secrets by revealing the DeCSS code that could circumvent the protection.
A lower court had ruled that disseminating industry secrets was allowable due to free speech, but the California Supreme Court has now overturned this ruling, saying that trade secrets cannot legitimately be posted online.
But the court did not make a decision on whether the code posted by Mr Bunner was still a trade secret, leaving it for a lower court to decide.