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The 10th Circuit Court of Appeals has upheld a lower court order to remove the Ten Commandments monument from the lawn of Bloomfield City Hall in New Mexico.
The three-judge panel ruled that the display is an "unconstitutional endorsement" of Christianity.
"Bloomfield has not undertaken sufficiently purposeful, public and persuasive actions to secularize the Monument's previous 'principal or primary' religious message," the panel wrote earlier this week.
"The City has never explicitly said this Monument was not for religious purposes, nor that it was exhibited only for its historical significance."
The monument, paid for with private money, was erected in 2011 after a resolution allowed private residents to place historical displays at city hall.
However, local Wiccans were offended by the statue and contacted the American Civil Liberties Union.
"Our clients who are not Christians, they took issue with this and it made them feel alienated from their community," Alexandra Smith, legal director for the ACLU of New Mexico, told local television station KRQE.
The ACLU filed a lawsuit against the city in 2012, claiming that the monument's location on government property equated to the government's endorsement of religion.
In 2014, a court judge sided with the plaintiffs and ruled that the City of Bloomfield violated the Establishment Clause by endorsing a religion.
The city appealed, but circuit court judges Robert Bacharach, Carolyn McHugh and David Ebel unanimously rejected their argument.
"In light of those considerations, and the situational context of the Ten Commandments on the lawn, the City would have to do more than merely add a few secular monuments in order to signal to objective observers a 'principal or primary' message of neutrality," they concluded. "Because we find an impermissible effect of endorsement that is insufficiently mitigated by curative efforts, we affirm."
The Alliance Defending Freedom (ADF) said the city is considering making another appeal.
"As the U.S. Supreme Court recently made clear, a constitutional violation doesn't occur simply because a person encounters speech he finds disagreeable and 'experiences a sense of affront,'" remarked legal counsel Jonathan Scruggs in a statement.
"In this case, a Ten Commandments monument nestled among many other monuments honoring significant documents in American history shouldn't be attacked simply because two people feel offended by it. For these reasons and others, we are consulting with our client to consider their options for appeal," he added.