When a big company goes after smaller fry in court, it’s usually the latter that cries for mercy. Not so in the case of Seattle’s Blue Nile, the Internet’s dominant diamond-seller.

The company is faced with a gloating adversary in the wake of an unfavorable jury verdict. In 2007, Blue Nile sued Yehuda Diamond Company, a small, private firm that operates out of the famous diamond district in midtown Manhattan, dominated by Hasidic Jews. Yehuda, which does no Internet sales, declined to settle. And Yehuda had cause to celebrate Monday, as a federal jury in Seattle threw out Blue Nile’s $60 million claim of misleading advertising.

It’s not hard to see what got Blue Nile so riled up. Yehuda specializes in what it calls “clarity enhanced” diamonds: ones with a tiny flaw (or what the industry prefers to call “feathers”) which are given a special treatment to make them seem perfect. Company president Dror Yehuda, speaking by phone from Israel, says the process was invented by his father.

On the home page of its Web site, Yehuda’s company compares the price of its “natural clarity enhanced” diamonds (sold only through dealers) to the price of Blue Nile’s “natural non enhanced” diamonds—ones that don’t have a flaw to begin with. (Yehuda’s stones are 20 to 30 percent cheaper.) Blue Nile called that presentation misleading, and sued. After a six-day trial, the Seattle jury found for the out-of-towners.

“Our stand, then and today, is that we did nothing wrong,” says Yehuda. “It is perfectly legal to compare prices of different products, so long as you say what the products are.”

Meanwhile, Yehuda has tried to turn the tables on Blue Nile by filing a suit of his own. Yehuda alleges that Blue Nile itself—a publicly traded company that had profits last year of about $12 million on sales of roughly $300 million—is selling enhanced gemstones like emeralds, sapphires, and rubies without sufficient disclosure.

John Baird, a spokesperson for Blue Nile, says the company was “puzzled and disappointed by the jury’s decision” in the Yehuda suit. “Consumers are the real losers” in this case, he says. As for Yehuda’s ongoing suit against Blue Nile, Baird says: “We sell only the high-quality gemstones in the industry. They meet all industry requirements for authenticity. We believe their lawsuit is meritless.”