SPLS Staples, Inc.

WASHINGTON—A federal judge Tuesday heard closing arguments in the government's antitrust challenge to the planned merger of office supply rivals Staples Inc. and Office Depot Inc., offering comments that could give hope—and worry—to both sides.

The Federal Trade Commission, which sued in December to challenge the merger, has struggled at times during more than two weeks of court proceedings. But on Tuesday the agency appeared to have a better day, at least on some issues.

U.S. District Judge Emmet G. Sullivan, who must decide whether to issue a preliminary injunction blocking the Staples-Office Depot deal, noted that the legal standards governing the case gave him a somewhat limited role, a fact that could benefit the FTC.

Judge Sullivan said his duty in deciding on the injunction was only to decide whether the FTC had established the building blocks of its case, not to conclude with finality whether the proposed merger would violate antitrust laws. He pointed to the FTC's plans to hold a separate, full-blown trial on the merger beginning next month.

The companies say that trial will never happen. If Judge Sullivan issues the injunction, the firms say they will drop the merger. And if he doesn't issue the injunction, that would amount to a ruling that the FTC hadn't even established the basic elements of its case.

In another potential boost for the FTC, Judge Sullivan suggested it wasn't necessarily relevant that the FTC in 2013 had allowed Office Depot to merge with OfficeMax. Staples has cited that merger approval as a basis for why its deal should also be approved.

"The landscape is different now," Judge Sullivan said, noting that Staples and Office Depot are the only two remaining national office supply chains.

Not everything Tuesday went the government's way, however, and the FTC still faces hurdles that could cause it to lose the case. Judge Sullivan suggested he had concerns about the reliability of key testimony offered by the FTC's economic expert in the litigation. The judge also questioned whether the agency had examined the office supply market correctly, another big issue that could determine the outcome.

FTC lawyer Tara Reinhart pressed the government's argument that a postmerger Staples could raise prices for large corporate customers who buy office supplies in bulk. She also criticized the companies' highly unusual decision, announced after the government presented its arguments, not to offer its side of the case at all.

"Key pieces of our evidence are unchallenged here," Ms. Reinhart said. Staples and Office Depot "didn't bother" to put their executives on the witness stand, she added, even though they sat in the audience to watch more than two weeks of court proceedings.

The judge said little about the companies' surprise legal strategy to cut the case short.

Staples and Office Depot earlier this month told the judge the FTC's case was so weak there was no need to put on defense witnesses. On Tuesday Staples lawyer Diane Sullivan said the government's case "defies reality and common sense."

Ms. Sullivan said the companies were facing years of declining revenue and demand and were "getting killed" by online competition, including from Amazon.com Inc.

"They need something drastic to stay competitive," she said, and a merger would help the companies save money and offer lower prices to consumers.

The judge previously had criticized the FTC for purportedly encouraging an Amazon executive to play down his company's ability to compete with Staples and Office Depot. But on Tuesday Judge Sullivan seemed bothered by repeated attacks from Staples' Ms. Sullivan, who characterized the FTC as a "desperate" agency that played "games" during its merger investigation.

The judge questioned why Ms. Sullivan assigned "a nefarious motive" to the FTC. In response Ms. Sullivan retreated somewhat, saying the FTC may have just made mistakes.

Judge Sullivan suggested that while Amazon had a strong record as a powerful marketplace force, it wasn't a sure bet that the online giant would soon replace Office Depot as a competitor to Staples. "There are some caveats," he said.

The judge's decision is expected in the next few weeks.

Write to Brent Kendall at brent.kendall@wsj.com

(END) Dow Jones Newswires

April 19, 2016 21:55 ET (01:55 GMT)

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