A distance-education institution based on Norfolk Island is suing the Australian Council for Private Education and Training for defamation.
Greenwich University, which offers degree courses over the internet, claims it was defamed by the council's national executive officer Tim Smith.
The university, which is not connected to the UK university with a similar name, is seeking A$30 million (£10.3 million) damages from the council.
The Norfolk Island Parliament passed an act three years ago establishing the former US institution as a university. A review of its operations by the education department found it did not meet normal Australian university standards.
Greenwich claims it was defamed by Mr Smith in a newspaper report last December, in which he referred to the impact of the issues surrounding Greenwich on the international reputation of Australia's education providers.
The legal action followed an approach from Greenwich last year seeking a "relationship" with the ACPET. The council has more than 600 privately run institutions among its membership.
Mr Smith said his council had rejected the Greenwich approach. He said it would not be appropriate given the discussion of the issues surrounding the university in federal parliament.
During a debate in the federal parliament last week, Kim Carr, the Labor Party's parliamentary spokesman on education, called on education minister David Kemp to shut the university.
Senator Carr told parliament that the government had committed "a reckless act of stupidity (and had created) a major crisis for the Australian higher education system" by not objecting before the island parliament passed the university act.
"This (university) is a shonky outfit of extremely dubious provenance," the senator said. He told parliament that Greenwich vice-chancellor Ian Murray Mackechne had been convicted in 1993 of the theft of A$220,000 from the Brotherhood of St Laurence and was jailed for 16 months.
The university chancellor, who is known as the Duke of Brannagh, was "an infamously litigious person" who bought the titles to the Russian royal throne.
A Greenwich spokesman said that despite repeated requests, neither the university nor the island government had seen the report of the review and the university did not know how it had failed to meet the standards.