It means the information from the files may be made public as part of any criminal proceedings, thus providing more ammunition for shareholders and car owners seeking damages.
Shortly after the dieselgate scandal broke in September 2015, VW hired law firm Jones Day and advisory firm Deloitte to investigate the issue and look at who was responsible.
VW never published the findings of the Jones Day investigation, although a summary was compiled in the form of a "Statement of Facts" for the U.S. Department of Justice.
Prosecutors searched the Munich offices of Jones Day in March 2017 in connection with a fraud probe related to 3.0 litre diesel engines made by VW's premium unit Audi.
VW fought the use of any files taken in the raid, and the constitutional court last July issued a temporary order blocking Munich prosecutors from assessing the material.
The dismissal of VW's legal challenge by the federal constitutional court on Friday is a further blow to VW, which is still grappling with the implications of the dieselgate scandal almost three years after it came to light.
Munich state prosecutors said it was not yet clear when they would start to examine the seized folders and computer data, but that they hoped they would make their investigations easier.
Volkswagen shares were down 0.7 percent at 1328 GMT, slightly underperforming the DAX index of leading German shares.
The ruling comes just weeks after VW was fined 1 billion euros ($1.2 billion) over emissions cheating, one of the highest fines ever imposed on a company by German authorities.
Munich prosecutors have also widened a probe into VW's luxury brand Audi to include now suspended Chief Executive Rupert Stadler among the suspects accused of fraud and false advertising.
Lawyers enjoy some protection from raids in Germany, but the court on Friday said that the seizure of the Jones Day documents did not infringe on VW's right to a fair legal process. It said that as a U.S. firm, Jones Day could not ask for protection of the German constitution and that the lawyers themselves, who had complained, were not personally affected.
The court also said that there was a risk of abuse should lawyers be protected from raids in anything other than special circumstances, because evidence could be "purposefully stored with lawyers or only selectively published".
VW said it welcomed the fact that the court's decision brought some clarity on the issue, even if the court disagreed with the carmaker.
The statement of facts, published as part of a $4.3 billion settlement with U.S. authorities, detailed a concerted effort by certain VW employees to destroy documents in anticipation of an order to preserve them.
The investigations singled out six senior managers below board level, an attorney and other VW employees. VW has argued that the development of illegal software, also known as "defeat devices", was the work of low-level employees, and that no management board members were involved.
U.S. prosecutors have challenged this by indicting VW's former CEO Martin Winterkorn. Last month, Munich prosecutors arrested Audi CEO Stadler, though he has not been charged with any crime.
(Reporting by Ursula Knapp; Additional reporting by Irene Preisinger and Joern Poltz; Writing by Maria Sheahan and Victoria Bryan; Editing by Emelia Sithole-Matarise, Keith Weir and Jan Harvey)