BPI is seeking fines, damages and costs in the High Court against the company.
The case relates to undertakings CD Wow made in January 2004 to the High Court that it would cease to illegally import CDs and music DVDs into the UK from south-east Asia.
Counsel for CD Wow shareholder Philip Robinson accepted that he was in breach of his undertakings to the court and that he bore some responsibility for failing to comply.
The counsel apologised on Robinson's behalf and confirmed that he had agreed to pay£50,000 to the music industry for costs incurred in bringing the case against him.
However, CD Wow is arguing that it should not have to pay the compensation.
BPI general counsel Roz Groome said: 'We believe CD Wow is guilty of flagrant and systematic breaches of a High Court order. The penalties for such breaches can be significant. Contrary to some reports, this case is nothing to do with price. Plenty of retailers manage to sell CDs at competitive prices without breaking the law.'
CD Wow is the UK's third biggest online music retailer with a 23 per cent share of the online CD album market. Retail sales at the company were£21.7 million in the UK in 2005.