The panel of five women and three men deliberated about 13 hours over three days before telling U.S. District Judge Tom Varlan they couldn't reach a unanimous decision in the case of Tommy DeFoe, 18.
Lawyers for DeFoe and for the Anderson County School Board both claimed victory.
DeFoe's attorneys felt they convinced at least some jurors of the rightness of their claims.
The school board's attorney said the result leaves the ban against the Confederate flag in place.
Varlan dismissed the jury without polling it and told lawyers he would hold a hearing in the next few weeks to "talk about where we go from here."
Both sides suggested a second trial was more likely than a settlement.
"I am up for a new trial. I am ready. This ain't over yet," DeFoe, who wore a belt buckle with a Confederate battle flag every day of the five-day trial, said outside the courthouse.
DeFoe's lawsuit, the latest in a string of similar claims from Texas to South Carolina since the 1990s, argued the teen's rights to free speech, due process and equal protection were violated by a dress code in Anderson County, near Knoxville, that bars the Confederate symbol from student clothing.
The flag is considered a symbol of racism and intolerance by some, while others, like DeFoe, consider it an emblem of their Southern heritage.
School officials said they worried that displaying the banner would lead to racial tensions and violence at Anderson County High, which has had problems before, and at nearby Clinton High School, which was bombed two years after becoming the first public school desegregated by court order in the Old South in 1956.
DeFoe's lawyers countered there was no evidence that racial problems resulted directly from the apparel.
They also criticized the dress code for being a blanket policy that left no discretion to school principals.
DeFoe attended the high school at a time when just one out of 1,160 students was black and then went to an all-white county vocational school.
By the time he finished vocational school last fall, he had been suspended more than 40 times for wearing Confederate flag apparel.
He sued the school system in 2006.
Anderson County High Principal Greg Deal said he backs the dress code even if there was only one black student who might be offended.
"My feeling is, it doesn't matter how many kids I have in the school. I have the right to make sure that none of them come to school under fear of intimidation," Deal said.
DeFoe's attorney Van Irion said other, similar cases in the past have typically not gone to juries but instead were dismissed by judges or settled out of court."The fact that we have gotten this far and the fact that we came so close to a victory ... should send a message to all school boards in the country that if you are banning things based on the fact that it is offensive, that violates the Constitution," he said.
The panel was all white, though that was not the result of a selection strategy by either side.
No blacks were in the small group of randomly selected people from which the panel was selected, a reflection of the significant white majority in East Tennessee.
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