Phuketwan journalists Alan Morison, an Australian national, and Chutima Sidasathian, a Thai citizen, had each faced up to seven years in prison.
''CPJ is relieved by today's court decision to drop criminal charges against Alan Morison and Chutima Sidasathian," said Shawn W. Crispin, CPJ's senior Southeast Asia representative.
"Authorities should follow up on today's verdict by scrapping the draconian laws, including the Computer Crime Act, that are too often abused and misapplied to threaten reporters and stifle free speech."
The charges stemmed from a 41-word paragraph published in July 2013 on the local news website Phuketwan. T
The paragraph was an excerpt from a Reuters special report which quoted an anonymous source claiming that Thai naval forces had profited from the trafficking of ethnic Rohingya.
Phuketwan published the Thai navy's denial of the allegation.
In 2014, Reuters won a Pulitzer Prize for a series of groundbreaking stories on the plight of ethnic Rohingya trafficked by human smuggling rings from Myanmar and Bangladesh to countries in Southeast Asia. (Authorities threatened to file defamation charges against Reuters, but did not follow through.)
Chutima had earlier served as a paid fixer for the Reuters news agency on two occasions and had introduced Reuters reporters to news sources.
Judge Chaipawat Chaya-anandpat said the navy's defamation case was not relevant to the Computer Crimes Act as alleged in the charges.
He ruled that the original Reuters story appeared to be accurate and did not cause panic or affect national security, according to news reports. The Thai navy has 30 days to appeal, news reports said.
"The judge did the right thing. This is a big step for freedom of expression and freedom of the media in Thailand," Chutima told reporters outside the Phuket Provincial Court after the verdict.
"I am happy that the court clearly said that the information we presented was useful to society and that they were not defamatory."
In a July 2015 letter to Prime Minister Prayuth Chan-ocha, CPJ wrote that the legal threat against Morison and Chutima was intended to discourage other journalists from probing the politically sensitive issue of human trafficking in Thailand which risked damaging the international reputation of the entire Thai armed forces.
News reports on today's verdict noted that Thai prosecutors in July indicted 72 people, including state officials and a senior military officer, on having suspected links to human smuggling networks.
The arrests came after local and foreign media exposed the abusive extent of the trafficking of Rohingya from Bangladesh and Myanmar to Thailand.