The ongoing battle between Tiffany and Swatch Group over the two parties’ failed watch company has escalated, with the legendary retailer launching a counterclaim against the leading watchmaker for some $589 million.

In 2008, Swatch Group founded Tiffany Watch Co. Ltd, under a partnership deal with Tiffany, a new division meant to produce Tiffany & Co. branded watches. Swatch Group chairman Nicolas G. Hayek Sr. predicted the Tiffany brand would become “one of the most important watchmakers in the world in the next five to 10 years.”

But in September 2011, the relationship ended in bitter recriminations, with Swatch terminating the relationship because of what it called Tiffany & Co.’s “systematic efforts to block and delay development of the business.”

On Dec. 23, Swatch Group and affiliate Tiffany Watch Co. sued Tiffany in a Dutch arbitration court for all losses associated with the dissolution of the company, which it quantified at $4.13 billion (CHF 3.8 billion).

In an 8K filed with the SEC, Tiffany called Swatch’s claim “without merit.” It adds that it believes a Swatch victory at the panel is “not probable.”

“If the Swatch Parties’ claims were accepted on their merits, the damages award cannot be reasonably estimated at this time but could have a material adverse effect on … financial statements or liquidity,” the statement adds.

Tiffany said its counterclaim charges that Swatch failed to provide appropriate management, distribution, marketing, and other resources for the brand.

In a statement, Swatch said the Tiffany countersuit has “no factual or legal basis.”

The arbitration hearing is currently scheduled for October 2012.

The Tiffany filing adds that, if the panel agrees that the agreement between the two parties should be terminated, the company will need a new manufacturer for Tiffany and Co. watches.

JCK