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: Quote, Profile, Research) 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."