Perelman had accused Morgan Stanley of fraud for helping its client Sunbeam hide its true financial condition while assisting in arranging the cash-and-stock transaction.
Coleman received about 14.1 million Sunbeam shares, which became worthless after Sunbeam fired chief executive Al Dunlap and admitted it had inflated sales to prop up earnings.
A Florida jury in May 2005 awarded Perelman $604 million of compensatory damages plus $850 million of punitive damages. The $1.45 billion sum rose to $1.58 billion with interest.
In a 2-1 decision, Florida's Fourth District Court of Appeal said Morgan Stanley should not pay any damages because Perelman failed to show any "legally cognizable damage" as a result of the alleged fraud.
"Because there was no proof presented at trial on the correct measure of damages, the trial court should have granted Morgan Stanley's motion for directed verdict," the court said.
Morgan Stanley spokeswoman Jeanmarie McFadden said: "We're gratified by this decision. There's not a lot of ambiguity here. This is a victory for us."
A spokesman for Perelman said in a statement, "We are disappointed at this temporary setback... We believe that we will ultimately prevail."
The May 2005 trial verdict had been a windfall for the billionaire, who controls investment vehicle MacAndrews & Forbes and cosmetics maker Revlon
"To a certain extent, caveat emptor reigns," said James Ellman, president of Seacliff Capital, a San Francisco hedge fund that owns Morgan Stanley shares.
Morgan Stanley had faced an uphill fight at trial because of its failure to produce e-mails demanded by Perelman lawyers.
Frustrated by the delays, trial judge Elizabeth Maass took the unusual step of instructing the jury that they should presume that Morgan Stanley had aided Sunbeam in fraud. She said the jury need consider only whether Perelman had relied on Morgan Stanley, and if so what Perelman's damages were.
Many analysts had expected the award to at least be reduced.
"Investors have largely forgotten about the verdict; but now that they've been reminded, they're glad it isn't an issue," said Jeffery Harte, an analyst at Sandler O'Neill & Partners LP in Chicago.
In February 2006, Morgan Stanley paid $15 million to resolve a U.S. Securities and Exchange Commission probe into its failure to retain e-mails.