Naruto, a seven-year-old crested macaque, snapped a photo with a toothy smile in 2011 using a camera belonging to David Slater.
The court also ruled that Mr Slater was entitled to be compensated for his legal fees, and the district court is in the process of determining how much he will get.
Slater and PETA announced in September they reached a settlement, under which Slater agreed to donate 25 percent of any future revenue from the images to charities dedicated to protecting crested macaques in Indonesia.
PETA "failed" as a friend to Naruto, the court said.
Naruto "lacked statutory standing" for such legal move, they said, as the law reserved that power for humans.
Bea said PETA had not established a significant relationship with Naruto and "we gravely doubt that PETA can validly assert "next friend" status".
"Puzzlingly, while representing to the world that 'animals are not ours to eat, wear, experiment on, use for entertainment or abuse in any other way, ' PETA seems to employ Naruto as an unwitting pawn in its ideological goals", the court wrote.
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As Courthouse News points out, the three-judge panel's opinion does not address some of the case's potentially more far-reaching issues, such as whether or not a human can own copyrights of images made by animals or machines. The 9th Circuit said it would hear the case despite the settlement.
They asked the 9th Circuit to dismiss the case and throw out Orrick's decision.
In fact, the court claimed PETA essentially abandoned Naruto.
The 9th Circuit also said refusing to dismiss the case "prevents the parties from manipulating" the precedent set by the judge. "Were he capable of recognizing this abandonment, we wonder whether Naruto might initiate an action for breach of confidential relationship against his (former) next friend, PETA, for its failure to pursue his interests before its own".
The court has also ruled Slater is entitled to compensation for his legal feels, with the district court now working out how much he should get.
Nevertheless, PETA still found a glimmer of victory in the 9th Circuit's ruling.
"I was making no money from photography, which is a hard industry to begin with", Slater, 53, said. "PETA will continue working until the last barrier falls and animals' fundamental rights are recognized under the law, including their rights as creators".