A three-judge state appellate panel struck down a 2006 settlement agreement that let Clear Channel Outdoor and CBS Outdoor display digital signs in Los Angeles.
The panel said the Los Angeles City Council should have never allowed advertising firms to convert billboards to electronic formats. The ruling states laws were in place that prohibited such changes.
The signs, mostly located on the city's Westside, must now be removed.
An earlier effort to ban digital billboards and supergraphics, which are multi-story ads on buildings, was ruled unconstitutional.
It's not clear how the decision will affect the Los Angeles City Council's effort to charge a fee for digital billboards.
Clear Channel Outdoor has not said whether it will appeal to the California Supreme Court.