Judge David R Lampe from the Superior Court in Kern County - north of Los Angeles - concluded that forcing Cathy Miller to fulfil the order would have contradicted her right to free speech.
The State of California took legal action against the owner of Tastries bakery in Bakersfield after she declined an order last year by a lesbian couple, Mireya and Eileen Rodriguez-Del Rio.
In a document seen by the Bakersfield Californian newspaper, Judge Lampe concluded: "No baker may place their wares in a public display case, open their shop, and then refuse to sell because of race, religion, gender, or gender identification.
"The difference here is that the cake in question is not yet baked."
He went on to say: "The right to freedom of speech under the First Amendment outweighs the State's interest in ensuring a freely-accessible marketplace.
"The right of freedom of thought guaranteed by the First Amendment includes the right to speak, and the right to refrain from speaking."
It is unclear whether the Rodriguez-Del Rio family will appeal the decision.
Last year, the international evangelist Franklin Graham expressed his support for Cathy Miller, saying: "I appreciate the fact that Cathy Miller stood up for her beliefs..."
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