Homeless activist Robert Norse claims in the suit against the city, the mayor and the council that his free-speech rights were violated when he was expelled from the meeting after giving a silent Nazi salute on March 12, 2002.
Norse made the gesture in support of a woman who was told by then-Mayor Christopher Krohn that she could not address the council because the period for public comment was over.
The officials have argued that they were entitled to eject Norse because his action was disruptive and came after the public comment period ended.
But an 11-judge panel of the 9th U.S. Circuit Court of Appeals unanimously said the council meeting continued to be a so-called "limited public forum," with some free speech rights available, even after the comment period was completed.
Judge Sidney Thomas wrote that although "Norse's provocative gesture was made after the public comment period closed, Norse still had a First Amendment right to be free from viewpoint discrimination at that time."
The future trial in U.S. District Court in San Jose will determine whether Norse was ejected because of disruptive behavior or because of his point of view.
The panel also said Norse is entitled to present additional evidence that had not been allowed in previous proceedings in the case.
This is the third time the case has come before the appeals court. In earlier decisions, a three-judge panel of the 9th Circuit in 2004 overruled a trial judge's dismissal of the lawsuit and ordered further proceedings.
After U.S. District Judge Ronald Whyte of San Jose dismissed the case a second time, a three-judge appeals panel last year upheld the dismissal. But this year, the appeals court agreed to grant a rare reconsideration of the case before an expanded 11-judge panel.