The 9th US Circuit Court of Appeals set aside a ruling by US District Judge Marsha Pechman in Seattle, which said the ban likely violated the constitutional rights of transgender recruits and service members.
While not ruling on the case's merits, a three-judge panel of the San Francisco-based appeals court said Pechman did not give the military's judgment enough weight, and ordered her to give it more deference. That finding could strengthen Trump's position on transgender troops going forward.
In January, the Supreme Court, which has a 5-4 conservative majority, lifted lower court injunctions that blocked the ban on constitutional grounds from going into effect, while challenges to its legality continued in lower courts.
The Supreme Court did not address the legality of the Republican president's ban, which reversed a landmark 2016 policy of his Democratic predecessor, President Barack Obama.
That policy allowed transgender people for the first time to serve openly in the armed forces without fear of being discharged, and to receive medical care to transition genders.
Attorneys for the transgender service members who filed the lawsuit could not immediately be reached. A spokeswoman for the Department of Justice also could not be reached.
Pechman was one of four federal judges who ruled against the administration on the transgender troop ban, saying it likely violated the US Constitution's equal protection guarantee.Trump had announced the ban in July 2017, and has said the old policy led to "tremendous medical costs and disruption". The president regularly cites incorrect figures for the costs of surgery.
In March 2018, Trump backed a revised policy from then-Defense Secretary James Mattis that banned, in some circumstances, transgender people with gender dysphoria, or distress resulting from internal conflict between physical gender and gender identity.