Jill Coccaro, 27, was arrested on a topless stroll two years ago, despite a 1992 state appeals court ruling that concluded women should have the same right as men to take off their shirts.
Coccaro, who now goes by the name Phoenix Feeley, remained in custody for 12 hours before she was told prosecutors were not going to pursue charges.
Her attorney, Jeffrey Rothman, told the Daily News that his client won the civil rights settlement from the city, which did not admit or deny wrongdoing.
"We hope the police learn a lesson and respect the rights of women to go topless," Rothman said.
Feeley told the New York Post that she was not treated well after her August 4, 2005, arrest in Manhattan's Lower East Side section. She claimed in an October lawsuit that a police officer yanked her out of a patrol car by her hair and police took her to a hospital for a psychiatric evaluation.
She told the newspaper she had gone bare-breasted after running the 2004 city marathon without police bothering her.
"I've always just felt that was something natural," Feeley said of going topless. "I've kind of always done it out of practicality."