The plaintiffs argued that because Trump properties rent out hotel rooms and meeting spaces to other governments, the president was violating a constitutional provision that bans the acceptance of foreign emoluments, or gifts from foreign powers.
But Judge George Daniels of the Southern District of New York ruled that the plaintiffs, led by the government watchdog group Citizens for Responsibility and Ethics in Washington (CREW), lacked standing to bring such a case, saying it was up to Congress to prevent the president from accepting emoluments.
CREW said it plans to appeal the verdict.
"As the only political branch with the power to consent to violations of the Foreign Emoluments Clause, Congress is the appropriate body to determine whether, and to what extent, Defendant's conduct unlawfully infringes on that power," Daniels wrote in his ruling.
The suit was one of the most high-profile efforts to take aim at Trump's decision to hold onto his hotel and golf-course business while in the White House. However, the president faces similar suits: one filed by a group of congressional Democrats and another filed by the attorneys general of Maryland and the District of Columbia.
After the ruling, CREW issued a statement saying that "while today's ruling is a setback, we will not walk away from this serious and ongoing constitutional violation. The Constitution is explicit on these issues, and the president is clearly in violation."
The group's suit, filed three days after Trump's inauguration, alleged that the president had violated a little-known, never-tested provision of the Constitution known as the foreign emoluments clause. Written to prevent early America's diplomats and officials from being swayed by gifts from wealthier nations, the provision bars officeholders from accepting a "present [or] emolument from any King, Prince or foreign state."
CREW charged that Trump was violating the emoluments provision because his company continued to do business and seek benefits from foreign governments after he became president, including by leasing space to foreign entities in Trump Tower and renting ballrooms for embassy functions at the Trump hotel in Washington.
The lawsuit also alleged that Trump probably had violated another constitutional provision, the domestic emoluments clause, which bars presidents from taking payments other than their salary from individual states. Several state government officials have stayed at Trump's Washington hotel or eaten at its BLT Prime steakhouse since Trump's election.
The Justice Department, representing Trump, argued that CREW and its co-plaintiffs lacked the standing to sue the president because none of them had been injured by his actions.
Government lawyers also argued that the country's founders didn't intend to stop presidents from selling things such as hotel rooms and banquet halls to foreign governments. Instead, they said, "emoluments" effectively referred to bribes - gifts to a U.S. official intended to buy favorable treatment.
During a court hearing Oct. 18 in Manhattan, Daniels seemed skeptical of that narrow definition. What if a foreign government wildly overpaid as a way of disguising a gift as a legitimate business transaction? he asked. He conjured up a hypothetical in which Trump owned a hot dog stand.
"So a foreign government says to the president, 'Sign this favorable treaty and we will give you $1 million. You own a hot dog stand so we will buy a million dollars in hot dogs,' " Daniels said, according to Slate.com.
"That might be a present," said government lawyer Brett Shumate.
Ultimately, however, Daniels ruled that the emoluments issue was meant for policymakers, not the courts, to decide.
The lawsuit filed by the attorneys general in June also asks a federal judge to order that Trump stop violating the provision. In that case, the plaintiffs use a different logic to argue why they have standing to sue. They say that the District and Maryland have lost money because of Trump's businesses, because the District owns a convention center and Maryland takes in tax revenue from a convention center and casino.
The first hearing is scheduled for January. The Justice Department has asked the judge to dismiss the case.