The announcement came during what had been expected to be the arraignment of Meshael Alayban, 42, on the charge punishable by up to 12 years in prison.
Orange County District Attorney Tony Rackauckas told the judge that investigators tried to corroborate the allegations but found the evidence did not support the claim. Rackauckas moved to dismiss the case.
Alayban smiled when her attorney, Paul Meyer, said, "You are free."
She had been free on $5 million in bail posted by the Saudi Consulate.
Another attorney in the case, Jennifer Keller, thanked the district attorney for "being a man of integrity" on behalf of Alayban's family and the nation of Saudi Arabia.
Meyer said in a statement that the maid's claims "were a scam to gain permanent resident status in the United States."
Prosecutors initially said Alayban took the maid's passport after the royal family traveled to the California city of Irvine, and paid her a fraction of what she was promised.
The maid left Alayban's Irvine condominium in July, got on a bus and told a passenger she escaped, authorities said. The passenger helped her contact police, who searched the condo where Alayban and her family were staying.
Alayban and her attorneys had compared the issue to a contract dispute and said the maid and her counterparts were treated well.
The nannies traveled to the U.S. on $10,000 first-class tickets, according to a statement read by Alayban's attorneys outside a July hearing.
It said the women had cellphones and Internet, and the family even bought cable in their native language. They were often dropped off to shop alone at neighborhood malls, all paid for by the family. the statement said.
In the statement, Meyer said his team gathered hundreds of photos and videos taken by witnesses and the maids themselves that show the extensive freedom they enjoyed. The evidence was shared with prosecutors, he said.
"We also discovered that the women had deleted many of the photos and messages they had posted on social media - and asked friends to delete them also - to destroy the evidence of the true lifestyle they were enjoying," Meyer said.