The lawsuit was brought by the owner of a German toy-making business, Kurt Hesse. He plans to use the Testarossa name for bicycles and electric shavers.
Ferrari must now forfeit exclusive rights to the Testarossa name in Germany and internationally, although it can appeal against the decision.
There was no comment from the Italian company, which had lodged an objection to forfeiting its right to the name.
A 1991 Testarossa.
The German court ruling will serve as a warning to other carmakers, according to one branding expert. "The court decision should sound the alarm bells for car companies who hold the rights to well-known names but do not use them," said Georg Jacobs.
Ferrari had not used the name for the past five years and "had not done enough to protect it," said court spokesman Miriam Reinartz.
Toymaker Hesse said he was delighted by the court ruling.
The name Testarossa may sound a little like testosterone, but it has nothing to do with male virility.
"Testa rossa" means "red head" in Italian and refers to the red-painted camshaft covers of the 12-cylinder engine used in the powerful, mid-engined sports car designed by Pininfarina. The model was built from 1984 to 1996.
Famous Testarossa owners include French actor Alain Delon and music legend Elton John. A white Ferrari Testarossa had a prominent role in the cult 1980s police TV series "Miami Vice."
