© BT
The two internet service providers had claimed the act, rushed through in the final days of the last Labour administration, was "inconsistent with European law".
The DEA includes measures forcing ISPs to issue warning letters to suspected illegal file-sharers or downloaders, as well as potentially block their net access if served with a court order to do so.
Online piracy is claimed to cost the creative industries around £400m in lost revenue every year, but the ISPs feel that the government's proposed approach to tackle the problem is "disproportionate".
But the ministers are now free to ask media regulator Ofcom to introduce the stricter measures, despite lawyers representing the ISPs saying that this could result in an invasion of people's privacy.
After today's ruling, which follows almost two years of legal wrangling, TalkTalk said that it was 'considering its options'.
"We're disappointed that our appeal was unsuccessful though we welcome the additional legal clarity that has been provided for all parties," the company said.
"Though we have lost this appeal, we will continue fighting to defend our customers' rights against this ill-judged legislation."
A spokesman for BT added: "We have been seeking clarification from the courts that the DEA is consistent with European law, and legally robust in the UK, so that everyone can be confident in how it is implemented.
"Now that the court has made its decision, we will look at the judgment carefully to understand its implications and consider our next steps."
Geoff Taylor, the chief executive of the British Phonographic Industry, said in a press statement: "The ISPs' failed legal challenge has meant yet another year of harm to British musicians and creators from illegal filesharing."
Christine Payne, the general secretary of the actors' union Equity, called on the ISPs to "stop fighting and start obeying the law".
She added: "Once again the court is on the side of the almost two million workers in the creative industries whose livelihoods are put at risk because creative content is stolen on a daily basis."
Despite losing the Judicial Review appeal, BT and Talk can still escalate the case to the UK's Supreme Court.
They could also start more concerted lobbying driven by campaign groups and grassroots activists, such as recently seen against the Stop Online Piracy Act (Sopa) in the US and the EU's proposed Anti-Counterfeiting Trade Agreement (Acta).
Peter Bradwell, of Open Rights Group, said that the Digital Economy Act is legislation formed on "hearsay and assumptions, not proper facts or analysis".
"There is one thing the court cannot tell us: that this is a good law. The Department for Culture, Media and Sport had no evidence when they wrote this Act, except for the numbers they were given by a couple of industry trade bodies," he said.
"This is a policy made on hearsay and assumptions, not proper facts or analysis. So significant problems remain.
"Publicly available WiFi will be put at risk. Weak evidence could be used to penalise people accused of copyright infringement. And people will have to pay £20 for the privilege of defending themselves against these accusations.
"The government needs to correct these errors with a proper, evidence-based review of the law."
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