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The ruling by the 5th District Court of Appeals in Fresno overturned a lower court ruling rejecting a lawsuit by two firearms trade associations that challenged the law.
The appeals court sent the case back to the lower court for further consideration.
"It would be illogical to uphold a requirement that is currently impossible to accomplish," Justice Herbert Levy wrote for the appeals court.
Supporters of the law signed by Gov. Arnold Schwarzenegger in 2007 touted it as the first such law to go into effect in the nation and said it would help law enforcement solve gun crimes by allowing them to link bullet casings to guns.
Hannah Shearer, a staff attorney at the San Francisco-based Law Center to Prevent Gun Violence, said the argument that gun manufacturers can't comply with the law is bogus and will be rejected by the trial court.
"California's microstamping law gives law enforcement a strong tool to investigate and solve gun crimes and also combat gun trafficking," she said.
The law requires new handgun models to have a microscopic array of characters in two spots that identify the gun's make, model and serial number and that are transferred by imprinting on each cartridge case when the gun is fired.
Gun rights groups say it is not possible to "microstamp" two areas of a gun. Only the tip of the firing pin can be microstamped, and current technology doesn't allow the stamp to reliably, consistently and legibly imprint on the cartridge primer from that part of the gun, they say.
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