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They also claimed that legislation violated several European laws on commerce and privacy.
Mr Justice Kenneth Parker rejected these claims, but upheld the objection to who pays for the law's enforcement, according to the BBC.
The ruling means government will be forced to re-examine the draft costs sharing order, but it is unlikely to cause significant delays to the implementation of the Act.
"If the government remains committed to this Act it could have a significant effect on the way people use the Internet," says Chris Watson (pictured), head of telecommunications at law firm CMS.
"The court's decision that the government order stating that service providers should be liable for 25% of the costs of the new measures is unlawful will be welcomed by ISPs, although it remains to be seen what mechanism of costs recovery will replace it," he says.
The Act, rushed through Parliament before the 2010 general election, requires internet service providers (ISPs) to co-operate with rights holders in identifying computer users who may have downloaded content illegally.
Supporters of the Act say the ruling confirms the Act is proportionate and consistent with European law and gives the green light to action to tackle illegal downloading in the UK.