Devon County Council acted unlawfully when setting the fees it pays to private care homes, a court has ruled.
The council had set an increase of 6.6% for 2012/13, which it said was fair.
A group of about 100 owners took legal action, saying the decision did not properly consider the impact on vulnerable residents.
In court in Wales, a judge decided the council failed to meet its public sector equality duty. The council said it was "very disappointed".
The ruling comes after the Devon Quality Care Forum (DQCF), which initially represented four care home owners, won an appeal earlier this year for the judicial review, which was started at Cardiff Administrative Court.
The homes said the new fees did not cover their full costs, especially for providing care for those with dementia.
'Fair and appropriate'
In a judgement delivered at the Cardiff Civil Justice Centre, the judge decided that the council had failed to meet its public sector equality duty and properly consider how its actions would impact on elderly residents, including those with dementia.
In a judgement covering 87 points, the council was told it acted unlawfully and was ordered to pay a third of the complainants' costs, amounting to about £220,000.
As part of that order, the council was also told it would have to make an interim payment of £30,000 within 28 days.
However, allegations by owners that the council had not consented lawfully over the setting of fees and that the initial model to calculate the fee levels was not rational or accurate were rejected by the judge.
After the ruling, the council said it welcomed the court finding in favour of it on two out of the three grounds.
Tim Golby, the council's lead on social care commissioning, said the ruling showed the model used to calculated the increase was "fair and appropriate".
He added that the council was "very disappointed the judge felt that we did not pay enough regard to equalities legislation".
He said: "We firmly believe that assessing and meeting the needs of vulnerable elderly people in a fair way is integral to everything we do and always at the forefront of our thinking."