The New Zealand Government has also been found to have illegally spied on the Megaupload millionaire prior to the raid on his mansion on January 20 last year.
Crown lawyer John Pike, acting for the US Government, argued in Wellington's Court of Appeal last September that district court had no power to make disclosure decisions in an extradition case.
Disclosure was extensive and could involve billions of emails, the court was told.
Dotcom's legal team said that without knowledge of the FBI's evidence, they could not adequately prepare for the extradition case.
In a 49-page judgement released today, the Court of Appeal accepted while an extradition judge could refuse to extradite on insufficient evidence, the hearing was not the same as a full trial.
Countries making extradition requests, like the US in this case, are bound to present its case with a "duty of candour and good faith".
But it is up to them to decide what information it wishes to put forward in support of its request.
"The suspect is entitled to challenge the reliability of the record, whether by argument or leading evidence," the judgement said.
If a court decides it needs more detailed information, however, it can ask the Ministry of Justice to seek it from the country wanting the person extradited.
For extradition to be granted, the court must conclude that there is a case for the suspect to answer.
"It follows from the foregoing analysis that, in our view, the disclosure orders in this case were wrongly made," ruled the Court of Appeal.
"We allow the appeal and quash the disclosure orders made by the District Court.''
Dotcom's legal team said it was considering an appeal to the Supreme Court.
"We are obviously disappointed and are considering an appeal," said lawyer Greg Towers.
The question of costs was reserved.
Dotcom's lawyer William Akel said the decision was a "technical one" which turned on a view of New Zealand's role in the international community. He said doing so with reference case law from Canada and the United Kingdom did not accurately reflect New Zealand's role as its own state.
The decision turned over an order which would have forced the US to show some proof of its allegations. He said it required a great deal of trust on the part of NZ courts that the US case against Dotcom should just be accepted at face value.
"If you just accept that on blind faith, does that just make the New Zealand courts an administrative step?"
- Additional reporting David Fisher of the New Zealand Herald
