Fonterra is accusing a local company with vested interests of spreading claims that its dairy products in Sri Lanka contain vegetable oil.
The group has taken court action to stop what it describes as the "baseless claims".
Early this week, a Sri Lankan daily newspaper The Beacon, published an article and editorial claiming Fonterra's imported milk products did not contain full cream but some sort of vegetable oil, following some analysis by a local academic.
Fonterra is now seeking $NZ17 million in damages from the newspaper, as well as a gagging order to stop it from republishing the article.
A BBC correspondent in Colombo says last year's melamine milk powder contamination scandal in China is still weighing heavy on the minds of the Sri Lankan community.
Fonterra spokesperson Graeme McMillan says no Fonterra products in Sri Lanka contain any pork, poultry or vegetable fats, and its quality assurance processes and food safety standards are based on meeting New Zealand and international regulatory standards.
Mr McMillan also says the newspaper published the claim without making any attempt to check the facts with Fonterra first.