The decision comes after North Carolina Gov. Roy Cooper and GOP
lawmakers reached a compromise last month and repealed
a controversial law -- known as House Bill 2 -- that required transgender people to use public restrooms that corresponded to the gender on their birth certificates.
The move was meant to end an outcry that caused businesses to leave the state and major sporting events and concerts to be canceled.
"For over a year now, House Bill 2 has been a dark cloud hanging over our great state," Cooper said on signing the legislation that repealed the law. "It has stained our reputation. It has discriminated against our people and it has caused great economic harm in many of our communities."
The new law is "not a perfect deal and it is not my preferred solution," he added.
The new law keeps in place provisions of the original bill that put the legislature, rather than local governments, in charge of regulating bathroom access; the new law also prevents local governments from passing or amending their own nondiscrimination ordinances relating to private employment and public accommodation until December 2020.
LGBTQ groups remain fiercely critical of the new law, however, calling it a repeal in name only because of the provisions the compromise retained.
The American Civil Liberties Union and Lambda Legal condemned the Justice Department's decision to drop the lawsuit.
"The Trump administration may want to use the fake repeal of HB 2 as an excuse to further turn their backs on the transgender community, but the rest of us aren't going to give up that easily," James Esseks, director of the ACLU's LGBT Project, said in a statement. "We'll continue this fight as long as it takes to truly strike down this disastrous law for good."
Vanita Gupta, the former head of Civil Rights Division at the Justice Department, tweeted against the lawsuit being dropped: "Sadly predictable. They can dismiss but they cannot erase. The fight for LGBTQ justice is strong."
Obama administration Attorney General Loretta Lynch filed the lawsuit against the original bathroom law in May 2016.
"We are seeking a court order declaring House Bill 2's restroom restriction impermissibly discriminatory, as well as a statewide bar on its enforcement," she said in her announcement.