Two care companies have launched libel actions against Rochdale Metropolitan Borough Council and its leader Colin Lambert.
The case followed comments made by Cllr Lambert after the jailing last year of a child sex grooming ring.
He had said the borough was the wrong place to put vulnerable young people in private care.
Meadows Care and Pathfinders Childcare claim they lost business worth more than £400,000 from eight local authorities that then sent children elsewhere.
The council has said it would defend the action.
A joint writ issued by law firm Manleys in the High Court alleges that Cllr Lambert’s comments also damaged the reputation of both companies.
It says that Lancashire and North Yorkshire county councils, the metropolitan boroughs of Calderdale, Doncaster, Kirklees, Rotherham and St Helens and the London Borough of Ealing stopped placements in Rochdale as a result of Cllr Lambert's remarks.
The writ alleges Meadows lost £260,000 and Pathfinder £156,000.
Manley’s managing director Mark Manley told Local Government Lawyer: “Before issuing proceedings we requested that Councillor Lambert retract his comments and apologise but he was unwilling to do either and his comments are highly damaging, inaccurate and have cost my clients significant sums of money.
“They are therefore determined to vindicate their reputations and in the absence of the serious allegations being retracted they were left with no alternative other than to seek redress from the courts.”
Rochdale’s deputy chief executive Linda Fisher said: “The council is taking the matter seriously and the action will be defended.”