Coachella is being sued for banning artists from playing other festivals around California for five months.
The Soul'd Out festival in Oregon claims artists have turned them down because of the "radius clause".
It's a contract between a festival and an artist which says they won't play in an area for a certain time period.
Coachella's agreement is the artist won't play within 1,300 miles of where it is held in Indio, California from December to May.
The idea behind a radius clause is that the festival is the only place to see that artist during that time.
Beyonce, Eminem and The Weeknd are headlining the festival which gets underway this Friday.
Lawyers for Soul'd Out claim the radius clause is "an unlawful restraint on trade, meant to use Coachella's market power in the music festival market to suppress competition by other festivals".
They say many artists turned down playing at Soul'd Out for the sole reason that the clause prevents them.
They also claim the festival allows some acts to break the clause if they are performing events for the festival owners, AEG Live.
The example being Jay-Z in 2010, playing the AEG run Staples Centre in Los Angeles before his headline slot.
In a statement, co-founder of Soul'd Out, Nicholas Harris said: "We seek no less than to operate in a fair and open environment.
"Music, and the culture that births it, is not a commodity to be exploited. It is meant to inspire and enrich our lives."
Goldenvoice who run Coachella with AEG Live responded with this statement to Celebrity Access:
"The producers of Coachella will vigorously defend against this lawsuit.
"It calls into question a long-standing industry practice that is crucial to our ability to continue offering fans the unrivalled experience for which Coachella has become known."
Radius clauses are used throughout the live music industry, even here in the UK.
It gives festivals a unique selling point if fans think they won't be able to see that particular act in their town or city.
However, the argument against the clause is that a festival like Coachella can sell out very quickly, whereas small venues and events need these names on their bill to sell tickets.
It can also be harmful to British acts who need to cram in as many gigs as possible when they are in the US.
According to the Los Angeles Times, Coachella generates more than 490 million pounds for the surrounding area in California.