A WTO appeal decision released Thursday in Geneva upheld a previous ruling that the European Union ban is "necessary to protect public morals."
But the three-member panel agreed with the prior dispute settlement ruling that exemptions to the ban have not been fairly applied.
It says the ban is applied "in a manner that constitutes a means of arbitrary or unjustifiable discrimination," particularly because of an exemption on seal products from Inuit or indigenous communities.
It finds that the EU has not sufficiently shown how its treatment of seal products from indigenous hunts versus commercial hunts "can be reconciled with the objective of addressing EU public moral concerns regarding seal welfare."
It also found "considerable ambiguity" in how terms such as "subsistence" are used for Inuit harvests. And it raises concerns that vague criteria could allow seal products from commercial hunts to enter EU markets under Inuit exemptions.
Canada appealed a November ruling that said while the EU seal ban undermines fair trade, those restrictions can be justified on "public moral concerns" for animal welfare.
At issue was a challenge by Canada and Norway of the 28-member EU's 2010 ban on the import and sale of seal fur, meat and other products.
The WTO appeal panel agreed with the November ruling that exemptions do not give the same market access to Canadian and Norwegian seal products as those from Greenland.
The federal government said in a statement Thursday the appeal decision confirms the ban is "arbitrarily and unjustifiably applied" and violates Europe's international trade obligations.
"Canada's position has been that the eastern and northern seal harvests are humane, sustainable and well-regulated activities that provide an important source of food and income for coastal and Inuit communities," it said.
"The ban on seal products adopted in the European Union was a political decision that has no basis in fact or science."
The statement said Ottawa is still assessing the decision, but animal welfare groups called the ruling a historic victory.
"The ban will need some amendments to make it WTO compliant," said Rebecca Aldworth, executive director of Humane Society International-Canada. "However, those are very small amendments that will happen, I think, very quickly. And ultimately the ban can stay in place pretty much as it is."
Aldworth said it's time for Ottawa to refocus its efforts.
"We hope that with this ruling, the Canadian government will stop trying to fight this futile battle to prop up the outdated and cruel commercial seal hunt and instead invest its energy in branding and labelling Inuit seal products so that they can once again resume access to the EU market."
The commercial seal hunt off Newfoundland last spring landed about 91,000 harp seals, up from 69,000 the year before but far short of the federal quota of 400,000.
About 900,000 seals are hunted globally each year, says the European Commission. Countries that commercially hunt seals include Canada, Norway, Greenland and Namibia.
Other countries that ban imported seal products include the U.S., Mexico, Russia and Taiwan.