Watson, 79, was part of the historic [Black Cats](http://www.thenorthernecho.co.uk/sport/football/sunderland?ref=au) side that beat Leeds 1-0 in the 1973 cup final under Bob Stokoe.
Now living with "probable Alzheimer's" and "probable CTE" (chronic traumatic encephalopathy), Watson's case could set a precedent for other former footballers and sportspeople to access benefits in the future.
In a judgment given today (Thursday, November 6), the Upper Tribunal overturned a previous ruling from the First Tier Tribunal (FTT) that supported the Department for Work and Pensions' decision not to award industrial injuries benefits to Watson.
Watson's wife, Penny, said: "David gave everything to football, and he has paid a heavy price.
Watson, 79, has taken an 'important step forward' in his case to recognise his brain injuries as a result of his football career. _(Image: DAVID WATSON)_
"We are relieved that the court has recognised that his injuries must be taken seriously and that his case deserves a proper hearing.
"This is not just about David, it is about all the players and families who are living with the consequences of head injuries."
His case will now be sent back to the FTT for reconsideration, applying the correct legal approach.
His wife, Penny, believes recognising the link between his current condition and the injuries sustained during his playing career should entitle him to industrial injury benefits.
Watson, who captained England and also played for Manchester City and Southampton, suffered countless collisions and impacts during matches and training.
He sustained 10 documented head injuries during the course of his employment.
The FTT dismissed his appeal as it could not be satisfied that these incidents directly contributed to his loss of faculty and concluded that the "process" of playing football routinely for many years would have resulted in the same neurological decline.
However, the Upper Tribunal, which heard Watson's appeal on October 1, ruled the effect of multiple undocumented incidents must be considered when assessing whether an injury will result in an award of benefits.
Ryan Bradshaw, Mr Watson's representative, said: "This judgment is an important step forward."