The state was on Thursday ordered to apologise to ex-Brighton Secondary College students Joel and Matt Kaplan, Liam Arnold-Levy, Guy Cohen and Zack Snelling, and pay them more than $400,000.
The court erupted in applause after the hearing, and dozens of the students' supporters began singing Israel's national anthem Hatikvah and hugging each other in celebration.
The students took the state, school, two teachers and principal Richard Minack to the Federal Court for a months-long trial last year.
Each of them left Brighton Secondary College prematurely, and four out of five departed the school due to anti-Semitic bullying.
Chief Justice Debra Mortimer on Thursday found Jewish students were not protected from bullying, discrimination and negligence when they attended the school between 2015 and 2020.
She said Mr Minack, as principal, failed to take action to address "a high level of anti-Semitic bullying and harassment of Jewish students" and swastika graffiti at the school.
She said he took a "different, and less favourable" approach to the bullying and harassment of Jewish students, in contrast to abuse perpetrated against other vulnerable minorities at the school.
There was an "inexplicable and unusual tolerance" for anti-Semitic graffiti at the school and a "preparedness to ignore, downplay and take less seriously complaints made by Jewish students", she said.
She said Mr Minack, the school and the state failed to enforce policies on racial harassment to protect Jewish students, and the students were not given a comfortable environment to call out harassment.
In particular, she said the school's leadership cohort should "hang their heads in shame" over the abuse Mr Snelling suffered.
He was assaulted by a group of students at night in a park, and at other times spat on, shoved and had a swastika carved onto his locker.
"I didn't have anywhere to go and they started punching me, kicking me," he told the the trial about the assault.
"It was dark and cold and raining and I was just getting beaten, just on the ground. I was defenceless."
Neither Mr Snelling, nor his family, were offered any support by teachers or the principal after the park beating.
Chief Justice Mortimer found Mr Minack delivered two school assembly speeches where he referred to his father, who served in the German army during World War II, as a "good man" but did not find he called him a "Nazi".
She said anti-Semitic behaviour against Jewish students at the school increased after the 2018 speech.
She also found teacher Paul Varney had singled Mr Cohen out by greeting him using "wholly inappropriate and ham-fisted attempts" at greeting him in Hebrew in front of other students in class.
Claims brought against the other teacher, Demi Flessa, were rejected.
The state was ordered to pay damages to the students, including more than $240,000 for Mr Snelling, $120,000 for the Kaplan brothers, $55,000 for Mr Cohen and about $11,000 for Mr Arnold-Levy.
The state must negotiate with the students on what form an apology will take, and serve them with a proposal by October 6.
The state was also ordered to pay up to $130,000 in costs.
Anti-Defamation Commission chair Dvir Abramovich said the outcome was a "thundering victory for justice" against what he termed as an "epidemic of anti-Semitism in schools".
Executive Council of Australian Jewry president Jillian Segal applauded the students in taking on the state with meagre resources.
"This decision will stand as a warning to any students who engage in anti-Semitic bullying," she said.
Education Minister Natalie Hutchins said the state would use the ruling to identify steps to eliminate anti-Semitism and racism in schools.
"Every Victorian student deserves to feel safe and respected at school - we deeply regret the anti-Semitism experienced by students at Brighton Secondary College and apologise unreservedly," she said.
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