Mr Blunkett's challenge comes in the wake of public anxiety at how Soham murderer Ian Huntley - who had faced numerous allegations of sexual assault in the past - was allowed to get a job as a school caretaker.
In January this year Mr Justice Wall, sitting at the High Court in London, concluded the West Midlands Police were wrong to flag up indecent exposure allegations made against a social worker.
The man, referred to only as Mr X, from Birmingham, was accused of twice exposing himself to a petrol station attendant near where he lived, but the case against him collapsed at trial.
The alleged victim, who told officers she would never forget the face of the man who exposed himself, failed to pick him out at court.
Instead, she pointed the finger at a man who bore little resemblance to Mr X.
But when X's employers found out about the allegation, he was dismissed from his job, and has been unable to obtain work since.
He says he has been 'devastated' by the disclosure, and argues his professional career - which he began in 1990 - is now over.
Rabinder Singh, for the home secretary, told England and Wales' most senior judge - the lord chief justice, Lord Woolf - there are a number of important issues of law at stake in the case.
Essentially, the courts have to strike a balance between individual rights and the need to protect the public against potential criminals - particularly sex offenders.
Mr Singh argued under the Police Act 1997 the allegations against Mr X had been properly disclosed to his employers, and he said Mr Justice Wall had 'erred in law' in deciding they hadn't.
But Dan Squires, for Mr X, said there was no 'pressing social need' for the unfounded allegations to be revealed, and also said it was wrong that X had not been asked to make representations to the chief constable before the disclosures were made.
Mr Squires also argued that chief constables should have to make a judgement on whether or not allegations are likely to be true, and said they must be 'fully investigated' before disclosures are made.
He also attacked the decision to put the allegations against Mr X on his Enhanced Criminal Record Certificate - available to employers - as 'manifestly unfair'.
The case, being heard by Lord Woolf, Lord Justice Laws and Lord Justice Mummery, continues.
STRAND NEWS SERVICE