The former singer, 57, said the end of the "high-pressure" case would now clear the way for a long-awaited reunion for members of the tartan-wearing 70s group, which has had more than 16 members over the years.
McKeown and four other members, Alan Longmuir, his brother Derek, Stuart "Woody" Wood and Eric Faulkner, had filed a lawsuit against Arista in 2007.
Alongside Duncan Foure, who replaced McKeown as lead singer, they are seeking around £30 million in royalties but the dispute was complicated by three other ex-Rollers countersuing, saying they should have been included in the claim.
Now a judge in New York has thrown out their case, leaving the way clear for the others, most of whom were in the band at the height of their fame with hits like Shang-a-Lang and Bye Bye Baby.
McKeown, who is currently touring with Les McKeown's Bay City Rollers, said: "The success I'm having would be multiplied four or five times over if the guys were able to get their act together and act like level-headed businessmen who have got a product to sell."
The Bay City Rollers were managed in the 1970s by Tam Paton who was blamed by the band for poor contracts. He died in 2009.