But U.S. District Judge Margaret M. Morrow ruled in favor of Carona, after reading a federal jury's findings that Hunt was part of Carona's executive management team.
Carona's attorney argued that elected officials are legally allowed to retaliate against political opponents under their supervision.
Morrow agreed, saying Carona did not break the law in demoting Hunt, following his 2006 bid for Carona's job.
After that election, Carona suspended Hunt for five months, and then demoted him to patrol duty.
Hunt, a 22-year veteran of the force who had run the department's San Clemente Division, quit rather than take the job.
Carona's attorney argued Hunt was demoted for abusing his position, commenting on high profile cases.
Carona, who was sentenced back in April to 66 months in federal prison for witness tampering in another case, told jurors he never broke the law.
"I am appealing that conviction, so I believe I complied with the law enforcement code of ethics," said Carona.
Hunt plans to run again for Orange County Sheriff in 2010 against incumbent Sandra Hutchens, who was appointed following Carona's resignation in January.
CNS contributed to this report.