US District Judge Araceli Martínez-Olguín in Oakland handed an early win to the group of states including New York, Colorado and Massachusetts, saying they had made a "strong showing" the deal would unlawfully decrease competition.
"Today's decision is an important victory for all those who would be hurt by this merger, and I look forward to continuing to fight this case," New York Attorney General Letitia James said.
The judge will hold a hearing on August 3 on whether the deal should be delayed throughout the course of the lawsuit, which could take months to reach a final ruling.
"We are confident the evidence will demonstrate that the State AGs' antitrust arguments are without merit as their alleged markets and claims of anti-competitive effects are without any basis in modern market realities," a Paramount spokesperson said.
The lawsuit, filed in Oakland federal court, threatens to derail Paramount CEO David Ellison's bid to transform his company into a major rival of Netflix and Disney. California and 11 states sued on July 13, arguing the deal would create a media behemoth with the power to raise prices in film and television.
Martínez-Olguín agreed with the states that letting the deal close would likely lead to changes that are hard to undo if the merger is ultimately found to be illegal, such as job cuts and sharing of sensitive information.
The judge said the deal looks likely to violate antitrust law if it gives the combined company 27 per cent of the market for distribution of widely-released films as the states have alleged. A final determination would come after both sides present evidence at trial.
Paramount Skydance's argument that companies like Amazon and Apple have entered the film market recently was not enough to show the merger is lawful, the judge said.
With fewer distributors, studios could find it easier to pressure cinema owners for a greater share of ticket revenue, the states have alleged.
A prolonged interruption could hurt Paramount Skydance financially. For each calendar day the merger is delayed past September 30, Ellison would be on the hook to pay Warner Bros shareholders a 25-cent-per-share "ticking fee," or about $US7 million a day, according to the merger agreement.
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