The panel issued its ruling in San Francisco by a 4-3 vote in a lawsuit by Alan Klein, an air traffic controller who was hit by a car while bicycling in the Angeles National Forest in Southern California to observe birds in 2004.
The car was driven by a U.S. Fish and Wildlife Service volunteer worker.
Klein, who was seriously injured and had to retire from his job, sought to sue the government, which owned the land and was allegedly the employer of the volunteer whose car hit Klein.
But the government, represented by the U.S. Justice Department, argued that it was shielded from the lawsuit by a California statute intended to protect owners of land used by others for recreation.
The law provides that landowners have no legal duty to keep their premises safe for use by others who enter their property for recreational purposes.
The state high court majority said, however, that the law was not intended to extend to cases of negligence in driving vehicles.
Justice Kathryn Werdegar wrote, "The duty to drive an automobile safely...does not arise from ownership or possession of the land."
Werdegar and others in the court majority said public policy favored a narrow interpretation of the liability shield law.
"The state has a strong interest in promoting the safe driving of motor vehicles and in preventing or minimizing personal injuries resulting from motor vehicle accidents," Werdegar wrote.
The ruling allows Klein to proceed with his lawsuit in federal court in Los Angeles.
The state high court was asked by a federal appeals court to weigh on the case because the state court's interpretation of the California law was the deciding factor on the issue of whether the U.S. government could be sued.