The Oregon Court of Appeals said the owners of the since-closed Gresham bakery Aaron and Melissa Klein had violated Oregon law by not baking the cake for Rachel and Laurel Bowman-Cryer.
After the 62-page opinion was released, the state Labor Commissioner Brad Avakian celebrated the court's decision and said: "Today's ruling sends a strong signal that Oregon remains open to all."
The appeals court verdict, released on Thursday, came almost nine months after attorneys representing the Kleins and the attorneys for the Bureau of Labor and Industries argued before the three-judge panel.
The Christian couple had argued that Mr Avakian violated state and federal laws by forcing them to pay emotional-distress damages to the lesbian couple.
Their lawyers also said Mr Avakian and the state Bureau of Labor and Industries violated the Kleins' rights as artists to free speech, their rights to religious freedom and their rights as defendants to a due process.
The decision comes weeks after a Christian cake artist from Colorado opened a case at the US Supreme Court over the right to refuse to make a wedding cake for a same-sex ceremony.
Jack Phillips from Masterpiece Cakeshop with the backing of religious freedom charity Alliance Defending Freedom, said the government cannot coerce him to create artistic expression that communicates a message with which he fundamentally disagrees.
The case also mirrors the legal action faced by Ashers Bakery in Norther Ireland.
The owners were found to have discriminated against a customer based on his sexual orientation after they refused to make a cake which said 'support gay marriage'.
They are still trying to overturn the decision that they should pay compensation.