The State of NSW was ordered to pay Mr Spedding the $1.5 million in December last year after police maliciously prosecuted the washing machine repairman while looking into the three-year-old's whereabouts in September 2014.
NSW Supreme Court Justice Ian Harrison found NSW Police and the Director of Public Prosecutions continued the case against Mr Spedding, in which made-up claims of historical sexual abuse against two girls were brought, for an improper purpose.
On Tuesday, NSW's barrister Stephen Free SC attempted to overturn this judgment, arguing the "excessive" amount was incorrectly calculated by Justice Harrison based on harm suffered by Mr Spedding as a prime suspect in the William Tyrrell investigation as well as the child sexual abuse charges.
"To view this as being in the worst kind of category of case justifying a much greater award of damages than any previous award one can only logically get to if you see it rolled up with the Tyrrell investigation more generally," the barrister said.
Murder charges laid on fabricated evidence or child abuse cases brought over fanciful allegations had not resulted in the same level of compensation as that ordered in this case, Mr Free told the NSW Court of Appeal.
The difficulty was "unscrambling the egg" and separating which damages came from which source, the panel of three appeal judges heard.
Mr Free submitted that while Justice Harrison identified the three police officers who were investigating Mr Spedding and who first charged him with sexual abuse, no one was named in the Office of the DPP over the claimed malicious prosecution.
"That kind of approach is apt to lead to error because it doesn't zero in on the particular act or particular individuals at particular times," he said.
Without naming individuals in the ODPP, it was impossible to assess their state of mind and determine whether they maliciously pursued the case against Mr Spedding, the court was told.
There was also no evidence to suggest the director or those under him were colluding with police officers, including former inspector Gary Jubelin who openly wrote that the criminal proceedings were a way to nail Mr Spedding for William's disappearance.
"(As) the person leading the investigation, I had to weigh up the cost of charging Bill against the cost of doing nothing and found the scales did not balance. The cost of doing nothing was heavier," he wrote in his book, I Catch Killers.
There was no evidence that Mr Jubelin was the critical decision-maker when it came to charging Mr Spedding, Mr Free said.
There was also nothing to say that the other police officers working on the case or the officers at the ODPP shared Mr Jubelin's ulterior motive, the barrister added.
Justice Harrison also allegedly erred by finding the DPP was not reasonable in bringing the sexual assault charges against Mr Spedding in April 2015 or for continuing with the case.
Prosecutors were not required to read over other material available to NSW Police which showed the charges were made up and were entitled to bring the matter to trial, despite a not guilty verdict eventually being handed down in March 2018.
"It's not the role of the prosecutor to usurp the function of a jury," Mr Free said.
In brief submissions, Mr Spedding's barrister Paul Blacket SC drew the appeal court's attention to a tip-off by Mr Jubelin which led to crowds of media being t the tradesman's Bonny Hills home for the arrest.
"He used the press not just to promote publicity about the disappearance of William Tyrrell, he was using the press to generate negative publicity about Mr Spedding," he said.
The hearing continues on Wednesday.
