UPDATE 3-Court overturns CBS fine over Janet Jackson flash

(Please note paragraph 16 contains language that may be offensive to some readers) (Adds comment from FCC chairman)

By Peter Kaplan

WASHINGTON, July 21 (Reuters) - The U.S. government's campaign against television indecency was dealt a blow on Monday when a court overturned a $550,000 fine against CBS Corp (CBS.N) television stations for airing a glimpse of pop singer Janet Jackson's breast during the 2004 Super Bowl broadcast.

The U.S. Court of Appeals for the Third Circuit said the Federal Communications Commission had "arbitrarily and capriciously departed from its prior policy" that exempted fleeting broadcast material from actionable indecency violations.

Jackson's right breast was exposed to almost 90 million TV viewers for a fraction of a second during the live 2004 Super Bowl football halftime show in what fellow pop singer Justin Timberlake later called a "wardrobe malfunction."

Timberlake ripped off part of Jackson's bustier exposing Jackson's breast during the show. Despite the brevity, lawmakers and regulators were outraged and vowed a crackdown on broadcast indecency.

The judges rejected the FCC's argument that the "fleeting" policy had only applied to words, not images.

"Like any agency, the FCC may change its policies without judicial second-guessing. But it cannot change a well- established course of action without supplying notice of and a reasoned explanation for its policy departure," Chief Judge Anthony Scirica wrote for the three-judge panel that heard the case.

CBS said in a statement it hoped the decision by the Philadelphia-based court "will lead the FCC to return to the policy of restrained indecency enforcement it followed for decades."

"This is an important win for the entire broadcasting industry because it recognizes that there are rare instances, particularly during live programming, when it may not be possible to block unfortunate fleeting material, despite best efforts," CBS said in its statement.

FCC Chairman Kevin Martin said he was "surprised by today's decision and disappointed for families and parents."

Martin said the commission had received hundreds of thousands of complaints about the incident and he noted the FCC's five commissioners voted unanimously to impose the fines.

The decision got a sharp rebuke from the Parents Television Council, an indecency watchdog group. It said the ruling "borders on judicial stupidity" and urged lawmakers in Congress to pass a bill to strengthen anti-indecency enforcement.

"If a striptease during the Super Bowl in front of 90 million people, including millions of children, doesn't fit the parameters of broadcast indecency, then what does?" the group asked.

There was no immediate comment from the FCC on Monday's ruling. Under the administration of President George W. Bush, the agency has embarked on a crackdown of indecent content on broadcast TV and radio.

The FCC could seek a review of Monday's decision by the full appeals court. It also could ask the U.S. Supreme Court to hear an appeal. In that case, it would have 90 days to file a petition with the high court.