Reconstructing high-quality images from low-resolution inputs using Residual Dense Spatial Networks (RDSNs) is crucial yet challenging. It is even more challenging in centralized training where multiple collaborating parties are involved, as it poses significant privacy risks, including data leakage and inference attacks, as well as high computational and communication costs. We propose a novel Privacy-Preserving Federated Learning-based RDSN (PPFL-RDSN) framework specifically tailored for encrypted lossy image reconstruction. PPFL-RDSN integrates Federated Learning (FL), local differential privacy, and robust model watermarking techniques to ensure that data remains secure on local clients/devices, safeguards privacy-sensitive information, and maintains model authenticity without revealing underlying data. Empirical evaluations show that PPFL-RDSN achieves comparable performance to the state-of-the-art centralized methods while reducing computational burdens, and effectively mitigates security and privacy vulnerabilities, making it a practical solution for secure and privacy-preserving collaborative computer vision applications.