The potential ban could strain US-China relations just as president-elect Donald Trump prepares to take office on January 20.
TikTok said it would now appeal to the Supreme Court, which could choose to take up the case or let the circuit court's decision stand.
"The Supreme Court has an established historical record of protecting Americans' right to free speech, and we expect they will do just that on this important constitutional issue," the company said.
TikTok will also be looking to Trump, who has emerged as an unlikely ally, arguing that a ban would mainly benefit Facebook parent company Meta's platforms, owned by Mark Zuckerberg.
Trump's stance reflects broader conservative criticism of Meta for allegedly suppressing right-wing content, including the former president himself being banned from Facebook after the January 6, 2021, Capitol riot by his supporters.
The US government alleges TikTok allows Beijing to collect data and spy on users. It also says TikTok is a conduit to spread propaganda, though China and app owner ByteDance strongly deny these claims.
- 'National security' concerns -
The law, signed by President Joe Biden in April, would block TikTok from US app stores and web hosting services unless ByteDance sells the platform by January 19.
While recognizing that "170 million Americans use TikTok to create and view all sorts of free expression," the three-judge panel unanimously upheld the law's premise that divesting it from China's control "is essential to protect our national security."
They found that the law did not hinder free speech as it was "devoid of an institutional aim to suppress particular messages or ideas."
The judges also disagreed with the idea that less drastic alternatives than a sale by ByteDance would solve the security issues.
US Attorney General Merrick Garland welcomed the decision saying "the Justice Department is committed to defending Americans' sensitive data from authoritarian regimes that seek to exploit companies under their control."
Trump's support for TikTok marks a reversal from his first term, when the Republican leader tried to ban the app over similar security concerns.
That effort got bogged down in the courts when a federal judge questioned how the move would affect free speech and blocked the initiative.
Among those who helped Trump to the White House in this year's election was Jeff Yass, a major Republican donor with ByteDance investments.
- 'Trump lifeline' -
"Donald Trump could be a lifeline for TikTok once he takes office, but halting the enforcement of the ban is easier said than done," said Emarketer lead Analyst Jasmine Enberg.
"And even if he does manage to save TikTok, he's already flip-flopped on his stance toward the app and there's no guarantee he won't go after it later."
The president-elect launched his own TikTok account in June, gaining 14.6 million followers, but has not posted since Election Day.
Despite the uncertainty, TikTok's presence in the United States continues growing.
The platform reported $100 million in Black Friday sales for its new shopping venture, and Emarketer projects US ad revenue will reach $15.5 billion next year, accounting for 4.5 percent of total digital ad spending in the country.
But Enberg warned a ban would significantly disrupt the social media landscape, benefiting Meta, YouTube, and Snap while harming content creators and small businesses dependent on TikTok.
Gautam Hans, professor at Cornell Law School, said the judges treated the government's national security argument "with great deference... while undervaluing the radical effects this unfortunate decision will have for individual speakers and First Amendment doctrine."
But given the unanimous ruling and the short timeline before the law's date of taking effect, it was "unlikely that the Supreme Court will take the case, which will almost certainly lead to TikTok's demise in just a handful of weeks," he added.
In contrast, Carl Tobias, of the University of Richmond, said that given the "critical implications" of the issues in question -- national security and free speech -- the apex court would likely take the case.
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