The judge wrote that while concepts that would allow an entity to pursue a liability claim "must, by their nature, be fluid, at the end of the day they must engage with reality."
In a dissent, Judge Richard Wesley said a trial should have been conducted to at least establish from expert testimony why Tower 7 collapsed.
Con Ed had claimed negligence resulted in part because Tower 7's tenants were allowed to install diesel backup generators.
The fuel burned for hours in the building after hijacked planes struck the two nearby towers, flinging debris into the smaller skyscraper. Con Edison had maintained that fuel from the diesel tanks heightened the fire's intensity.
The fire department decided to let Tower 7 burn because it was unable to reach adequate water supplies, there were no people in the building and 343 firefighters had already been killed that day, the appeals court noted.
Lawyers on both sides did not immediately respond to messages for comment.
A new 52-story 7 World Trade Center was completed in 2006.
-AP