Smith, the nephew of Sen. Edward Kennedy, has repeatedly denied he assaulted Audra Soulias.
"(The lawsuit) had no merit from the beginning, it was frivolous," Dan Webb, Smith's attorney, said Tuesday. "Of course she was trying to cash in... this case has been about money from the beginning."
Smith, who was cleared of rape charges in Florida in 1991, has said Soulias demanded a $3 million (euro2.24 million) payoff in exchange for not going to court. He said after the lawsuit was filed in August that "family and personal history have made me unusually vulnerable to these kinds of charges."
Soulias attorney Kevin E. O'Reilly said he would refile the lawsuit. He said Soulias was "hurt" the case was dismissed but "happy it all came out."
According to the lawsuit, Smith bought Soulias drinks while she was celebrating her birthday in January 1999, and after taking her to his Chicago home, he dragged her upstairs and assaulted her.
O'Reilly has said Soulias never went to the police. He has described it as an assault that stopped short of sexual intercourse. He also has acknowledged that Soulias continued to work for Smith for the next six months and during that time had consensual sex with him on a number of occasions.
Soulias has said she would not have filed the suit had Smith not telephoned her in January 2004 and left voicemails, which she believed were intimidating.
Webb argued during the hearing that the two telephone calls could not have resulted in the extreme emotional distress required under Illinois law to file such a lawsuit. Judge William D. Maddux agreed.
Webb said he hoped Smith would resume his career as a doctor. After the lawsuit was filed, Smith stepped down from his Chicago-based Center for International Rehabilitation, which helps victims of land mines.
"His career was derailed temporarily at least for the last several months," Webb said. "False allegations were made, the court system has vindicated him and he's going to move on."
In 1991, a Florida jury acquitted Smith of sexual assault and battery on a 30-year-old woman he had met at a night club. He said his sexual relations with the woman had been consensual.
Smith's mother is former U.S. Ambassador to Ireland, Jean Kennedy Smith, and he also is the nephew and the late President John F. Kennedy and Robert F. Kennedy.