Nestlé faces a fresh legal challenge to its hot Nespresso coffee capsule business after a rival filed a lawsuit against the Vevey-based food giant in France.

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The Swiss generic capsule maker Ethical Coffee Company (ECC), which has won legal battles against Nestle for the right to market its biodegradable capsules in Germany and Switzerland, claims Nestle has tried to discredit its products in France via its Nespresso club, internet blogs and distributors.

"Basically we want to stop this slurring and disloyal competition," ECC chief executive and founder Jean-Paul Gaillard told AFP on Wednesday, accusing Nestlé of providing "false information" to "smear our products."

Nestlé told AFP in an email that the ECC allegations were "unfounded", insisting it always acted according to the principles of free and fair trade and that it abided by "all applicable laws and regulations."

"We vigorously object to these unfounded declarations and we look forward to presenting our arguments within the appropriate framework," Nestlé Nespresso's general counsel Daniel Weston said, adding that the ECC allegations "were part of a recurrent pattern."

A source close to ECC said on condition of anonymity that the lawsuit sought damages of more than 50 million euros ($65 million).

Gaillard, who jumped ship as Nespresso managing director to create ECC in 2008, insisted that the company had no choice but to bring its battle to court.

"When we launched (the capsules) we knew there would be a fight," he told AFP, adding that there was "no problem with a normal fair fight between companies, but when it becomes unfair there is only one way to go, and that is the courts."

ECC launched its capsules in France in 2010 and in nine other European countries in 2011.

The French sector represents around 60 percent of ECC's turnover, it said.

In a bid to protect Nespresso's capsule sales, which hit three billion francs ($3.2 billion) in 2011, Nestlé fought back with lawsuits in several countries.

But the food giant suffered a double blow in July when Swiss and German courts decided not to grant an injunction against the sale of ECC's biodegradable coffee capsules.
   
The overall market for such capsules is expected to reach over $8 billion by 2014.