The decision was issued more than six months after arguments were heard in the case.
His brother, Tamerlan Tsarnaev, died in a gunbattle with police a few days after the bombings.
U.S. Circuit Justice O. Rogeriee Thompson, writing for the court, said the trial judge "fell short" in conducting the jury selection process and ensuring it could winnow out partial jurors exposed to pretrial publicity surrounding the high-profile case. "Dzhokhar will remain confined to prison for the rest of his life, with the only question remaining being whether the government will end his life by executing him", the three judges said.
A Boston jury convicted Tsarnaev on all 30 charges he faced in 2015, including conspiracy and use of a weapon of mass destruction.
Tsarnaev and his older brother Tamerlan set off a pair of homemade pressure-cooker bombs near the Boston Marathon finish line in 2013 in an attack that killed three people and injured more than 260 others.
Mr. Tsarnaev is being held at the US "supermax" prison in Florence, Colo., a site so remote and well-secured that it is nicknamed the "Alcatraz of the Rockies".
Justice Thompson said the pervasive news coverage of the bombings and their aftermath featured "bone-chilling" photos and videos of Mr. Tsarnaev, now 27, and his brother carrying backpacks at the marathon and of those injured and killed near its finish line.
One juror had said in Twitter posts that that she was "locked down" with her family during the manhunt and retweeted another post calling Tsarnaev a "piece of garbage", but later told the court she had not commented on the case or been asked to shelter in place, the defence said.
"This terrorist admitted in court he was guilty of crimes committed against our country".
Tsarnaev's lawyers have long argued that intense media coverage of the bombing had made it impossible to have a fair trial in Boston.
The decision cites two errors: the judge in Tsarnaev's convictions did not meet Patriarca standards and denied Tsarnaev's post-trial motion for judgments of acquittal.
"In sum", Torruella concluded, "the government can not show that the jury that convicted Tsarnaev and recommended that he be put to death was impartial". In the decision, the panel wrote that George A. O'Toole Jr., the judge in Tsarnaev's 2015 trial, did not adequately screen jurors for potential biases. In a concurring opinion, Judge Juan Torruella wrote that the case should never have been tried in Boston.
Speaking at an event with law enforcement in Tampa, Florida, President Donald Trump referred to Tsarnaev as an "animal".
"I am sorry for the lives I have taken, for the suffering that I have caused you, for the damage I have done, irreparable damage", he said.