diff --git a/CHANGELOG.md b/CHANGELOG.md
index c01e6998e..dcb4dec15 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -49,6 +49,7 @@ This project adheres to [Semantic Versioning](https://semver.org/spec/v2.0.0.htm
 - Fix stale timestamps reported by the last-value aggregation. (#5517)
 - Indicate the `Exporter` in `go.opentelemetry.io/otel/exporters/otlp/otlplog/otlploghttp` must be created by the `New` method. (#5521)
 - Improved performance in all `{Bool,Int64,Float64,String}SliceValue` functions of `go.opentelemetry.io/attributes` by reducing the number of allocations. (#5549)
+- Replace invalid percent-encoded octet sequences with replacement char in `go.opentelemetry.io/otel/baggage`. (#5528)
 
 ## [1.27.0/0.49.0/0.3.0] 2024-05-21
 
diff --git a/baggage/baggage.go b/baggage/baggage.go
index c40c896cc..42cd46d84 100644
--- a/baggage/baggage.go
+++ b/baggage/baggage.go
@@ -294,19 +294,45 @@ func parseMember(member string) (Member, error) {
 		return newInvalidMember(), fmt.Errorf("%w: %q", errInvalidKey, key)
 	}
 
-	val := strings.TrimSpace(v)
-	if !validateValue(val) {
+	rawVal := strings.TrimSpace(v)
+	if !validateValue(rawVal) {
 		return newInvalidMember(), fmt.Errorf("%w: %q", errInvalidValue, v)
 	}
 
 	// Decode a percent-encoded value.
-	value, err := url.PathUnescape(val)
+	unescapeVal, err := url.PathUnescape(rawVal)
 	if err != nil {
 		return newInvalidMember(), fmt.Errorf("%w: %w", errInvalidValue, err)
 	}
+
+	value := replaceInvalidUTF8Sequences(len(rawVal), unescapeVal)
 	return Member{key: key, value: value, properties: props, hasData: true}, nil
 }
 
+// replaceInvalidUTF8Sequences replaces invalid UTF-8 sequences with '�'.
+func replaceInvalidUTF8Sequences(cap int, unescapeVal string) string {
+	if utf8.ValidString(unescapeVal) {
+		return unescapeVal
+	}
+	// W3C baggage spec:
+	// https://github.com/w3c/baggage/blob/8c215efbeebd3fa4b1aceb937a747e56444f22f3/baggage/HTTP_HEADER_FORMAT.md?plain=1#L69
+
+	var b strings.Builder
+	b.Grow(cap)
+	for i := 0; i < len(unescapeVal); {
+		r, size := utf8.DecodeRuneInString(unescapeVal[i:])
+		if r == utf8.RuneError && size == 1 {
+			// Invalid UTF-8 sequence found, replace it with '�'
+			_, _ = b.WriteString("�")
+		} else {
+			_, _ = b.WriteRune(r)
+		}
+		i += size
+	}
+
+	return b.String()
+}
+
 // validate ensures m conforms to the W3C Baggage specification.
 // A key must be an ASCII string, returning an error otherwise.
 func (m Member) validate() error {
@@ -607,10 +633,12 @@ func parsePropertyInternal(s string) (p Property, ok bool) {
 	}
 
 	// Decode a percent-encoded value.
-	value, err := url.PathUnescape(s[valueStart:valueEnd])
+	rawVal := s[valueStart:valueEnd]
+	unescapeVal, err := url.PathUnescape(rawVal)
 	if err != nil {
 		return
 	}
+	value := replaceInvalidUTF8Sequences(len(rawVal), unescapeVal)
 
 	ok = true
 	p.key = s[keyStart:keyEnd]
diff --git a/baggage/baggage_test.go b/baggage/baggage_test.go
index 30150e4f9..146673846 100644
--- a/baggage/baggage_test.go
+++ b/baggage/baggage_test.go
@@ -9,6 +9,7 @@ import (
 	"slices"
 	"strings"
 	"testing"
+	"unicode/utf8"
 
 	"github.com/stretchr/testify/assert"
 	"github.com/stretchr/testify/require"
@@ -469,6 +470,18 @@ func TestBaggageParse(t *testing.T) {
 			in:   tooManyMembers,
 			err:  errMemberNumber,
 		},
+		{
+			name: "percent-encoded octet sequences do not match the UTF-8 encoding scheme",
+			in:   "k=aa%ffcc;p=d%fff",
+			want: baggage.List{
+				"k": {
+					Value: "aa�cc",
+					Properties: []baggage.Property{
+						{Key: "p", Value: "d�f", HasValue: true},
+					},
+				},
+			},
+		},
 	}
 
 	for _, tc := range testcases {
@@ -480,6 +493,53 @@ func TestBaggageParse(t *testing.T) {
 	}
 }
 
+func TestBaggageParseValue(t *testing.T) {
+	testcases := []struct {
+		name          string
+		in            string
+		valueWant     string
+		valueWantSize int
+	}{
+		{
+			name:          "percent encoded octet sequence matches UTF-8 encoding scheme",
+			in:            "k=aa%26cc",
+			valueWant:     "aa&cc",
+			valueWantSize: 5,
+		},
+		{
+			name:          "percent encoded octet sequence doesn't match UTF-8 encoding scheme",
+			in:            "k=aa%ffcc",
+			valueWant:     "aa�cc",
+			valueWantSize: 7,
+		},
+		{
+			name:          "multiple percent encoded octet sequences don't match UTF-8 encoding scheme",
+			in:            "k=aa%ffcc%fedd%fa",
+			valueWant:     "aa�cc�dd�",
+			valueWantSize: 15,
+		},
+		{
+			name:          "raw value",
+			in:            "k=aacc",
+			valueWant:     "aacc",
+			valueWantSize: 4,
+		},
+	}
+
+	for _, tc := range testcases {
+		t.Run(tc.name, func(t *testing.T) {
+			b, err := Parse(tc.in)
+			assert.Empty(t, err)
+
+			val := b.Members()[0].Value()
+
+			assert.EqualValues(t, val, tc.valueWant)
+			assert.Equal(t, len(val), tc.valueWantSize)
+			assert.True(t, utf8.ValidString(val))
+		})
+	}
+}
+
 func TestBaggageString(t *testing.T) {
 	testcases := []struct {
 		name    string
@@ -979,7 +1039,7 @@ func BenchmarkParse(b *testing.B) {
 	b.ReportAllocs()
 
 	for i := 0; i < b.N; i++ {
-		benchBaggage, _ = Parse(`userId=alice,serverNode = DF28 , isProduction = false,hasProp=stuff;propKey;propWValue=value`)
+		benchBaggage, _ = Parse("userId=alice,serverNode = DF28 , isProduction = false,hasProp=stuff;propKey;propWValue=value, invalidUtf8=pr%ffo%ffp%fcValue")
 	}
 }