NEW YORK AnywhereCD, a two-week-old online music retailer, filed a lawsuit against Warner Music Group WMG.N on Friday, alleging breach of contract, business defamation and trade libel.
But Warner Music said in response that it had also filed an action asking the court to move to enforce Warner's termination of contract with AnywhereCD.
The original dispute stems from a cease and desist order issued last week by Warner Music asking AnywhereCD, which offers both CDs and MP3s, to stop selling its artists' albums as MP3 files, a digital download format without anti-piracy protection.
Warner Music, like two of the other major record companies, Universal Music and Sony BMG Music Entertainment, currently only sells its digital music with anti-piracy protection software, known as digital rights management (DRM).
DRM is used to by retail partners such as Apple Inc.'s (AAPL.O) iTunes Music Store to prevent illegal copying and distribution.
EMI Group Plc EMI.L the number three company recently announced it would be dropping DRM on its music with various online retail partners.
AnywhereCD filed its suit at the U.S. District Court, Southern District of New York saying Warner Music, the fourth-largest record company in the world, had acted "maliciously and in bad faith".
Warner had taken issue with AnywhereCD after it offered MP3 albums for sale alongside a higher-priced MP3 album + CD package. Warner said AnywhereCD did not have a license to sell its music in the MP3 format.
In a statement on Friday Warner repeated that AnywhereCD had "flagrantly violated" the terms of the agreement between the companies.
"We regret that we were compelled to exercise our contractual rights to require the removal of our content from their site," said the statement.
AnywhereCD insists in its complaint that under both the "MP3 Album" option or "MP3 Album + CD" option the consumer would have in effect been buying a CD, but would have to pay an extra $3 for delivery.
AnywhereCD, started in San Diego by former MP3.com founder Michael Robertson, also claims that Warner had made false and damaging statements to the press -- quoting stories from Reuters and trade magazine Billboard.
But Robertson told Reuters: "The whole fight doesn't make sense to me. I think we can sit down and settle it."
Robertson has been a long-time supporter of the unprotected MP3 format, having started MP3.com, a digital music business, in the late-nineties.
Warner Music has said it does not believe in selling digital music in a format such as MP3 without anti-piracy software to prevent illegal copying or distribution.
Warner Music Chief Executive Edgar Bronfman told investors in February that selling digital music without protection was not logical.