In a writ lodged in the High Court, Freeserve alleges that customer service reps for CompuServe, which is owned by AOL, were telling people that Freeserve's provision for free access to the net was temporary and that its service would become fee-paying.
"At the end of 1998, Freeserve became aware that some CompuServe customers who were calling CompuServe to cancel their subscriptions in order to transfer to Freeserve, were being told by CompuServe's customer service personnel that they should not do so because Freeserve would be charging for its service in the future," Dixons said in a written statement on Friday. "This was blatantly untrue."
AOL, which in Britain operates as a joint venture between the US company America Online and the German media conglomerate Bertelsmann, says that it has responded to Freeserve's concerns. It believes the dispute will soon be settled out of court. AOL concedes that one outstanding issue is the amount of damages it will pay.
"In January 1999, Dixons made a complaint to CompuServe claiming that CompuServe customer support staff were giving incorrect information to its members about Dixons' Freeserve service," AOL said in a written statement on Friday. "CompuServe did not receive any corroborated evidence to support the complaint but conducted an immediate and thorough investigation into these allegations. This was promptly followed by an undertaking by CompuServe that its customer support staff would not make any statements to members which could be considered defamatory by Dixons Freeserve."
Both sides played down the gravity of the dispute. But it highlights the ferocious competition in the mushrooming market for internet service providers. Initially, companies like AOL sought to profit by charging fees both to subscribers and companies using the net to sell and advertise.
AOL charges pounds 16.95 a month for unlimited access to the net. CompuServe, which aims at a more professional audience, charges pounds 17.
In recent weeks, however, British internet service providers have set a worldwide trend by offering access to the net free. The strategy is to capture large numbers of net surfers and to think of them as shoppers in cyber shopping malls.
ISPs attracting the most surfers have the best chance of selling their wares over the net, and also selling space in their cyber-shopping malls to other companies.
Last month, booksellers WH Smith, The Sun, and HMV joined a growing number of companies offering free internet access.
The British internet retail market is expected to grow to pounds 3bn by 2003 from pounds 236m last year, according to Forrester Research.
Freeserve has 1.1 million subscribers in the UK. America Online has 17 million subscribers worldwide. In the face of the free access phenomenon, AOL and other fee-charging ISPs like Yahoo! are seeking to differentiate themselves.
Last week Dixons, the UK's biggest electrical retailer, announced that it had appointed Credit Suisse First Boston and Cazenove to consider a partial flotation of Freeserve.
Analysts said the exercise could value Freeserve at more than pounds 2.5bn. Shares in Dixons hit an all-time high.