The European Court of Human Rights has ruled that the Daily Mirror's freedom of expression was violated by the legal costs it had to pay when it lost a privacy case brought by Naomi Campbell.
In 2004, the Law Lords found the paper had breached the supermodel's privacy in an article about her drug addiction.
The ECHR ruled that the £1m costs the paper had to pay, which were partly lawyers' "success fees", were too much.
The Mirror will now have to discuss compensation with the government.
The government is already considering changes to the system after a review by Lord Justice Jackson in 2010 recommended lawyers in "no win, no fee" civil cases should no longer have a "success fee" paid by the defendants, but should get a share of damages.
At the time he said the system was not benefiting the public, with fees to lawyers sometimes amounting to more than 1,000% of damages.
The report suggested a 25% limit on the share of damages paid to lawyers in a successful claim.
Miss Campbell's case centred on the publication in February 2001 of a report about her drug addiction, including a photograph of her leaving a Narcotics Anonymous meeting in King's Road, Chelsea.
In March 2002 the model successfully claimed breach of privacy and the High Court ordered £3,500 damages from the Mirror.
An Appeal Court judgement overturned the High Court ruling in October 2002, ordering her to pay the paper's £350,000 legal costs.
Then in May 2004 the Law Lords - by a three-to-two majority - overturned the Appeal Court's decision, reinstating the High Court judgement and damages, based on breach of confidentiality and breach of duty under the 1998 Data Protection Act.
The judgment left the Mirror facing a total legal bill of more than £1m.
The Mirror complained to the ECHR that the privacy verdict in favour of Ms Campbell, as well as the amount of legal fees it had to pay, breached its right to "freedom of expression", safeguarded by the Human Rights Convention.
But the Strasbourg judges rejected the former claim, saying a balance had to be struck between "the public interest in the publication of the articles and photographs of Ms Campbell, and the need to protect her private life".
The ruling continued: "Given that the sole purpose of the publication of the photographs and articles had been to satisfy the curiosity of a particular readership about the details of a public figure's private life, those publications had not contributed to any debate of general interest to society."
There was therefore a lower level of protection of freedom of expression for the paper, and the UK courts had correctly backed Ms Campbell's claim for breach of her right to respect for her private life, it found.
But on the "success fees", the Human Rights judges said the requirement to pay them was based on a UK law which had been designed to ensure the widest possible public access to legal services in civil cases, including to people who would not otherwise be able to afford a lawyer.
That did not apply to Ms Campbell, who was wealthy and therefore not lacking access to court on financial grounds, it said.
There was also a risk to media reporting and freedom of expression, the verdict said, if the potential costs of defending a case risked putting pressure on the media and newspaper publishers to settle cases which could have been defended.
The judges concluded: "The requirement on Mirror Group Newspapers to pay the 'success fees', which had been agreed by Ms Campbell and her solicitors, was disproportionate to the aim sought to be achieved by the introduction of the 'success fee' system."