On Monday U.S. District Judge Araceli Martínez-Olguín granted a temporary restraining order pausing Paramount's proposed acquisition of Warner Bros. Discovery.
The order will remain in effect for 14 days, and the court set a hearing on the states' motion for a preliminary injunction for Aug. 3.
Attorneys general from 12 states, led by California Attorney General Rob Bonta, sued last week, arguing the merger would reduce competition, hurt filmgoers and cable customers and depress pay for actors and writers.
In her ruling Martínez-Olguín wrote, "Plaintiffs present compelling evidence that the combined firm resulting from the transaction will possess substantial market share in the wide-release theatrical distribution market," and said the court is persuaded it can presume the proposed merger is likely to violate antitrust laws.
The $111 billion deal would put under the same corporate roof Paramount and Warner's movie and television studios, the streamers Paramount+ and HBO Max, Paramount's CBS broadcast network, about 50 cable TV channels and both CBS News and CNN.
The transaction is largely bankrolled by Oracle co-founder Larry Ellison, the father of Paramount CEO David Ellison, and the deal has received the blessing of President Trump's Justice Department, filings and reporting show.
Paramount Skydance called the states' antitrust arguments "without merit" and said, "This merger is lawful, pro-competitive, and will benefit consumers, creators, workers, and the entertainment industry," the company said.
Martínez-Olguín said she did not find Paramount's counter-argument invoking big digital competitors persuasive and in a footnote characterized the streaming market as "ancillary" to the markets relevant to the litigation.
Filings show that starting Oct. 1 Paramount must pay roughly $650 million for every 90 days the deal is set back, and that it could owe Warner about $7 billion if the transaction is not consummated by June 4.
The merger also requires Federal Communications Commission approval because Paramount holds licenses for 28 local television stations, and the proposed combined company would have about 49% held by Middle Eastern sovereign wealth funds in non-voting shares.
The states are seeking a preliminary injunction that could freeze the deal indefinitely while the larger antitrust case plays out in court.
California Attorney General Rob Bonta said, "This is a critical first win in our case to ensure this megamerger never sees the light of day," and New York Attorney General Letitia James said, "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."
California Attorney General Rob Bonta also said, "Consolidation in the film and television industry not only leads to higher prices, but it also leads to fewer opportunities for important stories to come to life and fewer ways for audiences to encounter stories, ideas and perspectives beyond their own experiences."
Paramount promised Warner Bros. Discovery shareholders a 25-cent-per-share fee for every quarter the deal does not close by Sept. 30, and Paramount said it hopes to close the deal by the end of September.
Martínez-Olguín noted the temporary restraining order can be extended for good cause and could be extended to as long as 28 days, and the Aug. 3 preliminary injunction hearing could be delayed if the parties agree.
The pause represents the most significant legal challenge related to the merger globally to-date, and some foreign regulators, including the U.K.'s Competition and Markets Authority, are still reviewing the deal while none have issued an order that independently bars Paramount and Warner from closing.
Prosecutors representing the states said merging two major studios would cause "substantial harm on movie theatres, basic cable distributors, and, ultimately, audiences nationwide."
In her ruling Martínez-Olguín said the state coalition raised "serious questions" regarding the deal's impact on movie distribution and warned that allowing the merger to proceed now would make it "extraordinarily difficult to unscramble the egg" if the court decided later to block it altogether, adding that the "public's vital interest in antitrust enforcement" outweighed any temporary delay to the merger.
Under the 14-day injunction neither company can finalize the deal or start joining the businesses together, and Martínez-Olguín said the companies "will continue to operate as separate, viable companies competing in the marketplace" while legal proceedings continue.
Warner Bros. shareholders have approved Paramount's $111 billion takeover.
Combining Paramount and Warner Bros would end a century of fierce rivalry between the two companies; between them they own franchises like Harry Potter, Batman, Mission: Impossible and Top Gun, and TV channels including CNN, MTV and Nickelodeon. If the deal goes ahead the new company would account for over a quarter of major film releases.
The media companies argued the states had misread the market and that merging would improve streaming efficiency.