Terry Bryant was alleged to have taken the best actress Academy Award from the Governors Ball in 2018.
The 48-year-old was said to have been showing off the statuette to photographers on Oscars night and telling onlookers he had won.
Footage shows Bryant wearing a tuxedo, leaving the party holding an Oscar and saying, “We did it! We did it.”
In another clip he filmed himself clutching the statuette whilst saying, “My team got this tonight”.
His felony grand theft trial was to begin Tuesday but Los Angeles prosecutors said in court that they were unable to proceed with the case.
Superior Court Judge Sam Ohta then granted a defence motion to dismiss it.
The district attorney’s office gave no explanation for the decision, and Bryant’s attorney wasn’t immediately available for comment.
McDormand declined requests for a statement through a representative on Tuesday.
The Los Angeles District Attorney’s Office said: “The District Attorney’s Office today told the court that we are unable to proceed at this time.
“The defence made a motion to dismiss the case, and Los Angeles County Superior Court Judge Sam Ohta dismissed it.”
McDormand won the Oscar at the 90th Academy Awards for her portrayal of a grieving mother in the drama Three Billboards Outside Ebbing, Missouri, on 4 March 2018.
A film academy worker who was escorting a photographer at the party testified at a preliminary hearing last year that he heard over a walkie-talkie that McDormand’s Oscar was missing.
He said he quickly spotted Bryant and recovered the statuette.
It was immediately returned to McDormand who could be seen holding it at the Vanity Fair post-Oscar party hours later.
Bryant’s attorney, Daniel Brookman, argued in court last year that his client didn’t try to hide that he had McDormand’s Oscar, and the charge should be dismissed.
Mr Brookman said: “There was never any intent to deprive the owner of the property on a permanent basis.”
The attorney also said McDormand did not want Bryant to be prosecuted and displayed a police detective’s report that said the actress was “not desirous of prosecution”.