One day, the church’s youth pastor reported spying a for-sale sign before a large commercial building across town. Mr. Mortara went to view the property, a 46,000-square-foot facility near a plastic fabricator…”I looked at it and said, ‘This is it,”‘ Mr. Mortara says. “To this day, there’s still not another building in the city that would meet our needs.”

Sundays at Faith Fellowship Church, Pastor Gary Mortara calls on God’s help to heal the sick, repair torn marriages and rescue lost souls. But when city officials here rejected plans to move his growing congregation to a bigger building, Mr. Mortara turned to another authority: the Ninth U.S. Circuit Court of Appeals.

In April, the court, in San Francisco, answered his prayers, ruling that San Leandro may have violated federal law by refusing to amend its zoning code to accommodate the Pentecostal congregation. It was a broad reading of a 2000 law giving religious groups the power to ask courts to set aside land-use regulations they believe interfere with their expression of faith, and it now stands as precedent throughout the Ninth Circuit, a nine-state region sprawling from Montana to Hawaii.

“God was obviously wanting to do something that could have ramifications for all the churches in the U.S.,” says Mr. Mortara, a 52-year-old former golf champion known around town as Pastor Gary.

Such battles are playing out across the U.S., from Litchfield, Conn., where officials argue that quintupling the size of an 1870s building to house a synagogue would mar the historic downtown, to Yuba City, Calif., where a county supervisor opposed a Sikh temple in an agricultural zone for interfering with the “right to farm.”

In each case, the arguments are much the same: The religious group says federal law entitles it to do what its faith commands on its property, while cities, fiercely guarding their zoning powers, resist federal interference in decisions that affect local character and economic development.

The issue touches on some of America’s fundamental legal principles. The Constitution limits Washington’s power over state and local government. Yet it also grants Congress authority to enforce fundamental rights, including freedom of religion, and to regulate interstate commerce, which courts have interpreted broadly.

Invoking those powers, a Republican-controlled Congress in 2000 required states and cities to elevate religious use above other planning goals.

That law, signed by President Bill Clinton, reflected widespread political support for religious freedom. It was co-sponsored by two ideological opposites, Sen. Orrin Hatch, the Utah Republican, and the late Sen. Edward Kennedy, Democrat of Massachusetts, who said they found “massive evidence” that local governments were discriminating against religious groups.

But opposition to the law also crosses ideological lines and includes business groups and local governments, which say Congress relied on a few anecdotes to paint a misleading picture of intolerance.

“I see no evidence that there is a national conspiracy by local and state governments to be hostile to religion,” says Lars Etzkorn, director of the finance and economic development program at the National League of Cities. “Actually, it’s just the opposite, given what it takes for local officials to be elected.”

Because the federal law raises the risks for cities accused of blocking religious exercise—they must pay the church’s attorneys’ fees if they lose—local governments usually settle when sued, says Marci Hamilton, a Yeshiva University law professor. But with the backing of the cities’ league and other local government associations, San Leandro chose to fight Faith Fellowship. A federal district court sided with the city and threw out Faith Fellowship’s lawsuit, and when the Ninth Circuit ruled for the church, San Leandro hired Ms. Hamilton to appeal to the Supreme Court.

Last month, however, the high court declined to intervene, meaning that a federal court will now decide whether San Leandro broke the religious land-use law. Barring a last-minute settlement, the case could return to the Supreme Court after additional years of trial and appeals. More than a zoning change is now at stake; after years of frustration, Mr. Mortara sold the property at a loss in 2010, meaning that if the church prevails, the city could owe Faith Fellowship $4 million or more in damages and attorneys’ fees.

The property Mr. Mortara coveted lies within San Leandro’s so-called Industrial Sanctuary, where city leaders hope to lure employers attracted by the nearby port of Oakland and other transport hubs.

“I want jobs, jobs, jobs, whatever it takes to put people to work,” says John Faria, a former mayor and Chamber of Commerce president who opposed Mr. Mortara’s project. “And churches don’t put people to work.”

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