Producer Joe Roth states to LATimes that the Oz sequel "would absolutely not" have Dorothy involved. It might be to keep the Wizard going as there is a 20 year gap between the Wizard's arrival and Dorothy's according to writer Mitchell Kapner (recently hired to write the next film). Keeping what seemed to work which was James Franco as the main character along with setting up more mythology. I still think that Mombi and The Gnome King could have their origins explored in future films.
However, something else could be a reason Dorothy won't be in the film. Warner Bros. owns the original Wizard of Oz including many of the creative choices of the film like the look of Dorothy and many other things (Emerald City, ruby slippers, flying monkeys, wicked witch). Before Oz came out WB had at least three film projects in development. Oz: The Return To Emerald City had a solid concept as it would focus on Dorothy's granddaughter returning to Oz to fight a new evil. That project had a script written by Josh Olson (History of Violence). If Warner Bros. moved forward they would need to separate themselves from the Disney films. Perhaps, brining back Dorothy as the lead for their competing film if the studio decides to make one. It's possible that Disney could end up taking cues and having Dorothy's absent mother incorporated into their franchise instead of having to rely on her.