Well I guess this Alvarez went free on a technicality-- he's full of shit and everything he says is rubbish-- thus, his lies couldn't actually defame anyone. From the Ninth Circuit Ruling, emphasis is mine.
Apparently, Alvarez makes a hobby of lying about himself to make people think he is "a psycho from the mental ward with Rambo stories." The summer before his election to the water district board, a woman informed the FBI about Alvarez's propensity for making false claims about his military past. Alvarez told her that he won the Medal of Honor for rescuing the American Ambassador during the Iranian hostage crisis, and that he had been shot in the back as he returned to the embassy to save the American flag. Alvarez reportedly told another woman that he was a Vietnam veteran helicopter pilot who had been shot down but then, with the help of his buddies, was able to get the chopper back into the sky.

In addition to his lies about military service, Alvarez has claimed to have played hockey for the Detroit Red Wings, to have worked as a police officer (who was fired for using excessive force), and to have been secretly married to a Mexican starlet. As the district court observed, Alvarez "live[s] in a world, a make-believe world where [he] just make[s] up stories all the time . . . . [T[here's no credibility in anything [he] say[s]."

Well OK, I guess I see how this is free speech issue. B/C If all you do is lie, criminalizing lies would effectively silence you. Were it not so, any actor portraying a decorated service member would be guilty as well. As much as I think the movie Green Zone with Matt Damon was crap, its hardly criminal; though I do think I have a civil case demanding my money back.