The proposed stadium is key to a plan by a prominent Seattle investor to buy the Sacramento Kings and move them to Seattle renamed the SuperSonics to replace a team of that name which the city lost to Oklahoma in 2008.
The lawsuit, brought by a local longshoreman's union, argued that the backers of the proposed stadium - including private investors, the city of Seattle, and county officials - violated the State Environmental Policy Act because they did not complete an environmental impact statement prior to striking a deal last year to build a multi-use arena adjacent to the city's port.
Attorneys for the union said a traffic influx from the proposed arena would stifle transportation corridors leading in and out of the port, one of the nation's busiest.
Attorneys for Seattle, King County, and lead investor Chris Hansen's development company, WSA Properties III, argued their "memorandum of understanding" to build a stadium did not represent an action that required an environmental impact statement, but such a statement would be completed anyway.
After an hour-long hearing in front of a packed courtroom, King County Superior Court judge Douglass A. North sided with the stadium backers and rejected the union's lawsuit. North said there had not been a legally binding action by the stadium's backers that would require an environmental impact statement.
"We don't have any kind of legally binding decision here," Judge North said.
Roger Wynne, one of the lawyers working for the city, told Reuters the environmental policy act did not allow a lawsuit without a binding decision that would impact the environment.
"Right now, we don't have a binding decision to put a shovel in the ground in our name," he said.
Lawyers for the union said they haven't decided whether to appeal the ruling.
The proposed stadium deal, which has local support but still needs final approvals, calls for $200 million in public funding to be paid back by arena-related revenues.
Hansen and his co-investors have struck a deal to buy the Sacramento Kings basketball team and plan to rename it the Seattle SuperSonics, after the team lost to Oklahoma in 2008.
The deal requires approval by the National Basketball Association and may yet be challenged by a counter-bid from investors recruited by Sacramento Mayor Kevin Johnson.
(Reporting By Eric M. Johnson, writing by Bill Rigby; Editing by Cynthia Johnston and Eric Walsh)