The decision by the military commission appeals court — which has so far refused to hear arguments on the merits of Khadr's appeal — means the former Guantanamo Bay prisoner will have to wait even longer to make his case to a regular American court.
Also Monday, the U.S. Circuit Court of Appeals for the District of Columbia set aside two of three convictions against Ali Hamza al-Bahlul, who did media relations for terrorist mastermind Osama bin Laden.
The court found the military commission did not have the authority to try him for conduct that wasn't considered a war crime before 2006.
Khadr's lawyers have made similar arguments and the military commission appeals court was waiting for the al-Bahlul decision before holding any hearings on the Canadian's appeal.
It was not immediately clear how the decision might now impact Khadr's case.
In prosecuting Khadr, the Pentagon maintained he had violated long-standing American "common law of war'' by taking up hostilities against U.S. forces in Afghanistan.
Khadr's lawyers argued a detailed Department of Justice legal memo produced in July 2010 — but which only came to light last month — made no mention of any such body of law, suggesting it doesn't exist.
"Khadr's logical leap is unsupported," the government argued in its filings to the Court of Military Commission Review.
"(The memo) did not purport to address the issue Khadr seeks to litigate here."
The legal analysis concluded CIA agents would not be guilty of war crimes by using drones to kill people even though they are not part of the military and could be seen as "unprivileged" combatants.
In arguing the memo is irrelevant to Khadr's case, the U.S. government maintains CIA agents are "government actors" engaged in "lawfully authorized hostilities" while Khadr was a "non-governmental actor" engaged in hostilities not sanctioned by any state.
Khadr's Pentagon-appointed lawyer Sam Morison said the government's "artificial distinction" between state and non-state actors flies in the face of the plain language of the memo.
"The government's opposition therefore grasps at straws to avoid the inevitable conclusion that Khadr’s conviction lacks any legal foundation," Morison said.
Khadr pleaded guilty in October 2010 before a military commission in Guantanamo Bay to five war crimes committed as a 15 year old in Afghanistan in July 2002. He was given a further eight years and transferred to Canada in September 2012 to serve out his sentence.
He has since said he only pleaded guilty to get out of Guantanamo.
Last week, the Alberta Court of Appeal ruled his eight-year sentence amounted to a youth sentence, and ordered he serve his time in a provincial jail. Ottawa is appealing to the Supreme Court.
Khadr, now 27, remains the only person ever prosecuted for the death of an American soldier in Afghanistan.