Washington (CNN) -- Lying about military honors is not a crime, a federal appeals court has ruled, tossing out the prosecution of a California public official who falsely claimed to have won the prestigious Medal of Honor.

The 9th Circuit U.S. Court of Appeals ruled 2-1 there was inadequate "compelling governmental interest" when Congress passed the Stolen Valor Act in 2006.

Xavier Alvarez had won a seat on the Three Valley Water District Board of Directors in 2007, and at his first open meeting claimed to be a retired Marine who won the Medal of Honor in 1987. The highest military decoration awarded by the U.S. government is sometimes mistakenly called the Congressional Medal of Honor. "I got wounded many times by the same guy," Alvarez declared, according to court records. "I'm still around."

While the three-judge panel ruled Alvarez's free speech rights were violated, they showed little sympathy for his actions, calling them "nothing but a series of bizarre lies."

"We have no doubt that society would be better off if Alvarez would stop spreading worthless, ridiculous, and offensive untruths," the panel concluded in its ruling, handed down Tuesday. "But, given our historical skepticism of permitting the government to police the line between truth and falsity, and between valuable speech and drivel, we preemptively protect all speech, including false statements, in order that clearly protected speech may flower in the shelter of the First Amendment."

Alvarez was prosecuted on one count of falsely verbally claiming to have received the medal. He had conditionally pleaded guilty, reserving his right to later appeal on constitutional grounds. He was fined $5,000, given three years' probation, and resigned last fall from the utility board based in Claremont, California.

There was no word whether the Justice Department will appeal the opinion to the Supreme Court.

The split ruling noted Alvarez apparently "makes a hobby of lying about himself." Acquaintances told the FBI he claimed to have won the Medal of Honor during the U.S. Embassy hostage crisis in Iran in 1979, or during the Vietnam War. He also spread stories he was a former professional hockey player and a police officer.

Beyond the circumstances of this appeal, the broader constitutional concerns deal with the power of the government to limit certain types of speech, particularly those made by public officials and those made during election campaigns.

The Supreme Court has been split in recent years whether false statements of fact should be protected under the Constitution, except in very limited circumstances. The Justice Department had argued Alvarez's statements deserved no legal protection because they had little value, and that there was a larger societal need to "protect speech that matters," in this case the valor and integrity of military heroes who rightfully earned their medals.

A dissenting judge in the case, Jay Bybee, agreed. "The Supreme Court has regularly repeated, both inside and outside of the defamation context, that false statements of fact are valueless and generally not within the protection of the First Amendment."

The high court in April struck down another congressional law, this one designed to stop the sale and marketing of videos showing dogfights and other acts of animal cruelty. The 8-1 majority said it was an unconstitutional violation of free speech.

"The First Amendment itself reflects a judgment by the American people that the benefits of its restrictions on the government outweigh its costs," said Chief Justice John Roberts of the 1999 law. He concluded Congress had not sufficiently shown "depictions" of dogfighting were enough to justify a special category of exclusion from free-speech protections.

The government lawyer in charge of defending the animal cruelty law was then-Solicitor General Elena Kagan, now the newest justice on the Supreme Court. Her colleagues in their ruling had nearly completely rejected her position in the case.

The federal Stolen Valor Act was designed to "protect the reputation" of military decorations, citing "fraudulent claims surrounding the receipt of the Medal of Honor [and other Congressionally authorized military medals, decorations, and awards]." Similar laws have been in place since 1948. Other federal judges have recently found the Stolen Valor Act to be similarly unconstitutional.

As for Alvarez, he is currently in the California State Prison in Centinela, convicted separately earlier this year for defrauding the water district, according to court records.

The medals case is U.S. v. Alvarez (08-50345).