The government charged that the company, which was later acquired by a California firm, wanted to get an idea of Amazon's book-selling strategy.
Prosecutors charged Councilman with gathering thousands of messages in violation of laws governing interception of wire, oral or electronic communications.
Councilman appealed, claiming that laws prohibiting interception did not apply because the messages were stored as a part of delivery to customers.
Andrew Good, Councilman's lawyer, declined to comment on his client's motives. But Good said no one ever complained about the practice and that the case resulted from a tip in an unrelated investigation.
Good said the decision mirrors other rulings that give employers and companies broad rights over e-mail stored in their systems.
In upholding a lower court decision, the appeals panel majority said Congress intended for "any temporary, intermediate storage" of communication to be governed by laws other than those involving wiretapping or other interception. The court rejected the government's argument that if communication is being transmitted and stored simultaneously, it is protected by interception laws.
"We believe that the language of the statute makes clear that Congress meant to give lesser protection to electronic communications than wire and oral communication," the court said. The judges acknowledged, however, that the wiretap law may now be outdated given advances in technology.
In dissent, Judge Kermit V. Lipez said the majority misread the law and that the ruling "will have far-reaching effects on personal privacy and security."
Like several privacy advocates, the judge raised particular alarm over what the decision might mean for the ability of law-enforcement to monitor e-mail.
Based on the court's ruling, law enforcement officers would need only a search warrant to gain access to e-mail before it reaches its recipient, instead of a wiretap order, which can be far harder to obtain.
The decision, Lipez said, "would undo decades of practice and precedent regarding the scope of the Wiretap Act and would essentially render the Act irrelevant to the protection of wire and electronic privacy."
In other legal cases, courts have treated temporary storage of electronic material differently. Swire said disputes have arisen over whether Internet service providers are liable when their customers have illegally copied music or other works on their systems, thus temporarily storing them on the ISP's networks. Courts have found no such liability, he said.
A spokeswoman for the U.S. attorney's office in Boston, which prosecuted the case, declined to comment on the decision.
An appeal of the case could put the office at odds with the FBI, which has been pushing Congress and the Federal Communications Commission for greater flexibility to monitor Internet communications.
"This decision makes clear that the law has failed to adapt to the realities of Internet communications and must be updated to protect online privacy," said Kevin Bankston, an attorney for the Electronic Frontier Foundation, a privacy advocacy group.