"Policing alone (or not policing) does not amount to operating or managing a park or zoo," wrote U.S. District Court Judge H. Russel Holland in the Nov. 29 ruling.
In a court filing submitted by a late-December deadline set by the court, the U.S. Justice Department opted not to file an amended complaint, but reserved the right to do so at a later time.
U.S. Department of Justice officials were not available for comment.
The rest of claims in the lawsuit remain intact. The Department of Justice sued the towns in June, alleging that they have supported a campaign of intimidation against former members of the FLDS and denied them services.
Most of the residents in the towns are members of a polygamous sect run by imprisoned leader Warren Jeffs.
Jeffs is serving a life sentence in Texas for sexually assaulting two underage girls he considered his brides. He continues to try to lead the sect of about 10,000 people from behind bars. The sect is a radical offshoot of mainstream Mormonism whose members believe polygamy brings exaltation in heaven.
Blake Hamilton, an attorney representing the two cities, called this the most significant development to date in the lawsuit.
"The Department of Justice brought a lawsuit in which it couldn't support one-third of the allegations it was making," Hamilton said.
This court victory for the polygamous towns comes on the heels of a setback.
In early December, judge Holland denied a request to move a civil rights lawsuit against Colorado City and Hilldale out of Arizona because their attorneys did not make a strong showing of inconvenience.
A trial in that case is likely more than 1 1/2 years away, Hamilton said.
While the civil rights lawsuit plays out in court, Utah state officials have begun a long-overdue process of formulating a plan of how to redistribute property and businesses in the towns.
In late November, the Utah attorney general hosted a meeting with community members to discuss options.
Utah took over a church trust that controls the properties in 2005 amid allegations of mismanagement by Jeffs and other church leaders. A November federal appeals court ruling cleared the way for the state to break up the church trust and sell homes, businesses and farms in the two small towns.