Telecoms giant Ericsson and small British rival Sendo clashed over handset technology patents as the Swedish firm sued Sendo, which in turn complained to the European Commission.
"We believe that Sendo is using Ericsson patented technology, but they have so far not signed a licence agreement with Ericsson. Under these circumstances we have no choice but to take Sendo to court," Ericsson said in a statement.
Sendo acknowledged it was not paying royalties on the level demanded by Ericsson, saying it was still trying to negotiate more favourable terms.
It said Ericsson was not sharing patents equitably in the way envisioned by the Commission after it helped fund development of the GSM mobile phone system.
"We're not looking for a free ride here, and we respect the intellectual property rights of these companies, but we want everybody to be on a level playing field," said Hugh Brogan, chief executive of the privately-held company, speaking by phone from its headquarters in Birmingham, England.
Mr Brogan said the price of GSM phones had dropped to the point that, in some cases, royalty costs alone amounted to more than 10 per cent of the retail price of a handset and that the original royalties were no longer fair and reasonable.
This problem does not affect the major manufacturers, which need not pay each other because they cross-licence patents, but it does affect new companies trying to enter or compete in the handset market, Sendo said.
"We don't think they're even-handed about it," Mr Brogan said. Big manufacturers such as Nokia, Motorola and Ericsson were pioneers in making handsets for the GSM mobile phone system in the early 1990s.
An industry consortium helped develop the system, now used in more than 100 countries, with funding from industry and from the European Commission. The technology is vital for any firm trying to sell phones in most parts of the world.
Ericsson said it wanted monetary damages from Sendo as well as an injunction against the continued sale and marketing of its mobile phones.
Sendo sells mobile phones to operators that need tailored designs and software and has signed deals with Britain's Vodafone and Spain's Telefonica.
With five million phones sold last year, Sendo is a tiny player in a market that totalled 684 million units in 2004, of which the top six firms accounted for almost 80 per cent. It had sales of $420 million and 300 staff.
Mr Brogan said he expected to sell 6.5 million to seven million handsets this year. He said earlier this year the firm had "bumped in and out of profitability".