"Kmart's account became severely delinquent, and Kmart asserted numerous credits and deductions, which were not authorized," according to the complaint filed Thursday in Superior Court in San Francisco.
Sega alleges that in August 1999 Kmart agreed to purchase Dreamcast systems. In September 1999, Sega launched the Dreamcast system and began shipping the units to Kmart stores nationwide. In June 2000, Sega asserts, it placed a hold on shipments because of delinquent payments.
Sega alleges that Kmart has only paid $23.7 million of the $25.9 million bill.
"We've been working with Kmart since June to work this out, but they've applied bogus deductions and they're maliciously trying to underpay Sega," said Charles Bellfield, a Sega spokesman. "They left us with no other option."
Representatives from Troy, Mich.-based Kmart would not comment on the case.
After months of speculation in the gaming industry and denials from Sega, the company announced in late January that it would halt production of its Dreamcast game console and focus on making software for handheld devices, phones and set-top boxes. The company also cut the price of Dreamcast systems in inventory from $150 to $100.