The administrative court ruled new infections across the country stem from private gatherings or in connection with travelling instead of from the hospitality industry.
The court ruled closing food and drink establishments was a “disproportionate encroachment on the freedom” of the industry.
Now German authorities will have to decide whether they want to take the case to a higher court in order to force bars and restaurants to close.
Lawyer Niko Harting told Bild: “It is now up to the Senate whether it goes to the Higher Administrative Court.”
Earlier this week, Chancellor Angela Merkel warned the country was heading for a “disaster”.
This warning came after regional leaders refused to sign off on her harsh measures following a rise in cases across Europe.
Ms Merkel told them on Wednesday: “What we’ve agreed is not enough to ward off disaster.”
Germany recorded the highest daily increase for a second day running.
A staggering 7,334 cases were recorded today with a further 24 deaths.
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“We have to stop that. Otherwise this won’t end well.”
Bavaria’s governor Markus Soeder, warned “Europe’s prosperity is at stake”.
Other neighbouring counties have taken more drastic measures to curb the spread of the virus.
Protests erupted across Spain today as new restrictions were imposed by regional governments including in Barcelona.
Cases across Europe continue to rise with Bosnia, Croatia, Czech Republic, France, Italy and Poland all recording their highest ever daily cases.
Italy recorded a further 83 deaths, nearly double the number on Wednesday.
This week, France reported more than 100 deaths per day on average while the UK had 110 and Spain 160.
French Prime Minister Jean Castex said: “Our compatriots thought this health crisis was behind us.
“But we can’t live normally again as long as the virus is here.”
Czech Republic Prime Minister Andrej Babis also warned they need to build “extra capacity” hospitals as soon as possible.
He said: “We have no time.
“The prognosis is not good.”