The top Italian court ruled late Wednesday that the evidence on which he was originally convicted — in the biggest case of its kind against a multinational for asbestos-related deaths — was now out of date, according to the Italian news agency Ansa.
Schmidheiny is the former owner of Italian company Eternit, which made construction material using asbestos in the 1970s and 1980s.
He was taken to court by a group of former employees and in 2012 was jailed in absentia for 16 years, a sentence that was raised by an appeals court to 18 years in 2013.
The tycoon was also ordered to pay tens of millions of euros in compensation to local authorities and families of the victims, who included factory workers and residents who lived near the three Eternit factories in northern, central and southern Italy.
Victims' relatives who had gathered at the court to hear the verdict shouted "Shame on you" after hearing that Schmidheiny's sentence had been overturned, Ansa said.
Supreme court prosecutor Francesco Mauro Iacovello had argued earlier in the day that the tycoon's conviction should be ruled invalid because the statute of limitations had expired in the case, sparking outrage from victims' families.
"Contorting the individual's right to justice may well produce justice today — but it could create a thousand more injustices in the future," said Iacovello.
"Sometimes what is right and what is just take different directions," he said.
"But for magistrates there is no alternative - they have to do what is right."
The statute of limitations surrounding the Eternit case should have been considered to have expired in 1998 - 12 years after the company went bankrupt, Iacovello said.
Referred to by Forbes magazine as the "Bill Gates of Switzerland" for his philanthropy, Schmidheiny had been found by the appeals court to have caused "a permanent health and environment catastrophe".
His lawyers argued that he did not have a direct responsibility in the management of Eternit Italy.
Once hailed as a miracle product, asbestos was used mainly as building insulation for its sound absorption and resistance to fire, heat and electrical damage.
It was banned in Europe in 2005, but is still widely used in the developing world.
The inhalation of asbestos fibres can cause lung inflammation and cancer, and symptoms can take up to 20 years to manifest after exposure.