(FORTUNE Small Business) – At first Richard Kidman couldn't figure out why, after 23 years of running R.D.'s Drive-In, everything seemed to be falling apart.

It had never been easy to manage a business in Page, Ariz. (pop. 6,500), 130 miles from the nearest city and surrounded by Mars-red rocks and soaring cliffs. But lately Kidman's problems, especially employee turnover, were only getting worse. New hires were quitting after only a few days on the job. His restaurant has a staff of about 20, yet he went through 52 people in three months. He even considered giving signing bonuses--unheard-of for a burger joint. On the other side of the counter, things weren't much better. Page's first drive-thru, once flocked to for its green-chili cheeseburgers and chocolate shakes, was losing customers.

It took Kidman a long time to link his problems to what he now calls the "trash talking" going on behind the counter. Since R.D.'s is only three miles from the Navajo reservation, nearly all of Kidman's employees are Native Americans. About half of them speak Navajo, often in the restaurant. Kidman doesn't speak the language (it's so complex that it was used as military code in World War II), which over the years had been an inconvenience but not a significant problem. Then he got a call from an employee, telling him that she was quitting because some of his staff had been making rude comments in Navajo about her. He soon learned that other workers had been similarly offended. Customers had overheard vulgar remarks, and even the Kidmans weren't spared--they'd been given Navajo nicknames. (Let's just say his was a part of the male anatomy; his wife, Shauna, allegedly had a similar moniker, but no one will reveal it because it's said to be too offensive.) "There was bad language, talk about female body parts, and talking about people meanly," says Ro Redshirt, a Navajo employee who's been at R.D.'s for five years.

When Kidman realized what was going on, he took what he considered a necessary step: requiring that his workers speak English while on the job. Steven Kidman, the eldest of the Kidmans' seven children, did some research on the website of the U.S. Equal Employment Opportunity Commission (EEOC), the branch of the federal government designed to protect employees from discrimination based on race, religion, sex, or national origin. Following what he interpreted as the EEOC's guidelines, Steven wrote an English-only policy, posted it, and asked employees to sign in acknowledgment.

The Kidmans never anticipated what happened next. Four Navajo workers, offended by the policy, refused to sign. They left their jobs--whether they quit or were fired is under dispute--and found a lawyer, who said the policy was discriminatory and filed a complaint with the EEOC. After an investigation, the EEOC found the policy in violation of the Navajos' civil rights. When the Kidmans refused to retract it or to apologize, the EEOC filed a lawsuit. Since then, they've become a lightning rod for English-only rules in the workplace, used by groups on both sides of the argument to advance their agendas. The Kidmans were the subject of an editorial in the New York Times (which said they were wrong) and another in the Washington Times (which said they were right). Coverage in the local press has been more divisive, and their cause was taken up by an ultraconservative organization with a controversial background.

Last year the EEOC received 228 cases challenging English-only policies, and it's likely to see more this year. With minority populations growing and an increasing number of Americans speaking English poorly or not at all--up 65% since 1990, according to the U.S. Census Bureau--the issue isn't going away. Current events have only complicated the problem. "Given everything going on in the world, a lot of groups are concerned about things that can lead to knee-jerk discrimination," says Vicki Donati, an employment lawyer and partner at Neal Gerber & Eisenberg in Chicago. "Expect to see a new smattering of these lawsuits."

This one could set a precedent, though--the EEOC has never filed an English-only suit on behalf of Native Americans. "The EEOC wants a new law," Kidman says. "There's a small mom-and-pop business on the other side--what an easy target." But his business might not survive the fight. The case is scheduled to go to trial next year, and Kidman says it will cost about $100,000 in legal fees before it ever gets there. If it does reach trial, the fees would escalate to $300,000, he says, which in most employment-discrimination lawsuits cannot be recovered even if the defendants win. A loss in court--and damages--could push that amount to more than $500,000. That's not all. Because the business is not incorporated, Kidman and his wife are named personally as defendants in the suit. It's possible they could lose not just the restaurant but their house as well.

The government says it has no intention of bankrupting the family, and it has already made offers to settle, contingent upon an apology and a reversal of the policy. But Kidman has refused each offer, maintaining that he's done nothing wrong. "It was a decision to help our business survive," he says.

Richard Kidman has spent most of his life doing what he does now: flipping burgers and pumping soft-serve ice cream. Growing up in Salt Lake City, he ran his father's Dairy Queen from age 13 until he graduated from the University of Utah. After college, Kidman took a sales job at Xerox, but 11 years later he returned to the food business. In 1975, Kidman and a neighbor, Dean Slavens, opened a burger place in Flagstaff and, with more ego than creativity, named it after their first initials--R.D.'s. A few years later they bought a diner called the Pink Sans in Page, Ariz., about 130 miles from Flagstaff, which they expanded and rebranded as the second R.D.'s.

At the time there wasn't much in Page, but for restaurant entrepreneurs, there would be soon. The land was barren desert, part of the 17 million--acre reservation that's home to 250,000 Navajos. About the size of West Virginia, it's the largest reservation in the country. In the late 1950s the U.S. government did a land swap with the Navajos to build the Glen Canyon Dam and power plant on what has since become Page town property. Kidman arrived in 1978, and by that point the dam had formed nearby Lake Powell, which started to draw a steady stream of summer tourists. Attractions like the Grand Canyon, Bryce Canyon, and Zion National Park also helped, as did Page's intensely beautiful landscape. (Recently Britney Spears came to the town to shoot a video atop one of the cliffs, but the Kidmans say she didn't stop for a milkshake at R.D.'s.)

The Kidmans became sole owners in 1980, when Richard bought out his partner--Slavens is now the mayor of Page--and since then the national fast-food chains have figured out what Kidman recognized early. He now competes against McDonald's, Burger King, Jack in the Box, Subway, A&W, Taco Bell, and KFC.

For as long as he's been in Page, Kidman says he has tried to maintain good relations with Native Americans. He's hired about 1,100 employees since 1978; most have been Navajos. He helps out at one of the Mormon churches on the reservation, and he and Shauna deliver food--milk, bread, hot dogs--to Navajos living there. Until now, he's never been accused of racism.

But a lot of the tensions this fight has uncovered were present before Kidman ever got to Page. The region has an ugly history of abuse and subjugation that the Navajos, who have always lived on this land, remember. For more than 80 years Native American children were "assimilated" by being sent off the reservation to government schools, where their hair was cut off, their names were changed, and their possessions were burned, according to a spokesman for the Navajo Nation. They were taught English and forbidden to speak Navajo; those who did were beaten and forced to eat lye soap. Today an estimated 40% of middle-aged Navajos, and just 20% of the younger generations, speak the language. That worries many in the tribe, who take pride in their history. "We're afraid the language is dying," says Tom R. John, who lives on the reservation. "We're holding on to it for dear life."

The Kidmans' policy, some Navajos say, only reminds them of past abuses. "It's upsetting because of our heritage," says Roxanne Cahoon, one of the four plaintiffs. "It's like telling Native Americans all over again how to speak, what to do, or where to live." Cahoon and the three other employees in the suit--Elva Begay Josley, Freda Douglas, and Doretta Benally--all say that they worked more efficiently in Navajo. It's the first language for three of the four, the language in which they dream, pray, and talk to their families. "It was easier to explain things to other employees in Navajo," says Benally. "What would take once to explain in Navajo took four or five times in English."

They also say Shauna Kidman told them their ability to speak Navajo was a plus, given that R.D.'s has so many customers from the reservation. The four say they never spoke inappropriately in Navajo, nor did they hear anyone else do so. For them, the policy seemed to come out of nowhere. If there were problems with rude comments, Begay Josley says, management should have dealt with that directly. "The Kidmans got rid of the wrong people," she says.

Since the English-only sign went up in June 2000, the Kidmans and the women who filed the complaint haven't seen much of each other. That hasn't stopped them from slinging mud via their attorneys and the small-town rumor mill. The attacks have been nasty at times: The women accuse the Kidmans of racism, and the Kidmans respond that the four are "opportunists" trying to weasel money out of them.

The two sides can't even agree on the chain of events that led to the lawsuit. The Kidmans say that the employees refused to sign the policy and quit instead. The employees maintain that they were fired. They say they weren't allowed to speak Navajo at all, even on breaks or their lunch hour, while the Kidmans say breaks (and any other time the employees weren't being paid) were always exempt from the rule. With such varied stories, it's hard to sort out the truth--and that task may be left to a judge. But as the case meanders through the justice system, the dispute is taking its toll, leaving its mark in the form of a divided town, a suffering business, and a mountain of legal fees.

This past November the Kidmans placed an ad in a local newspaper titled "A Lifetime of Work Destroyed?" They say that their perceived reputation as anti-Navajo has done irrevocable damage. There were several damning letters to the editor of the Navajo Times, another local newspaper, that called for a boycott. Yet despite the P.R. headaches and the ongoing lawsuit, Kidman says sales have held steady at $500,000 a year. In fact, Kidman says that R.D.'s notoriety has won him as many new customers as it has cost him. His family launched a website that has drawn 884 signatures so far, with messages like "I worked at R.D.'s when the policy was put in place--it was necessary," and "I love the burgers there, please don't shut it down," and "I don't want my tax dollars paying for this." The website was also designed to raise money, but so far the grand total of donations is just $7,200.

The financial burden of fighting has created another set of problems for the Kidmans. Because $7,200 is nowhere near enough to cover their legal fees, they've aligned themselves with an Arlington, Va., group called ProEnglish, which has pledged to match what the Kidmans raise, up to $45,000. ProEnglish calls itself an "English-language advocate" and promotes things like official English laws, an end to bilingual education, and the right of employers to maintain the English language in the workplace.

But some digging reveals that ProEnglish is part of a larger organization called US Inc., an umbrella group with a controversial past. US Inc. also funds something called the Social Contract Press, which espouses limits on immigration and has published allegedly racist documents. Because of such views, US Inc. has been designated a hate group by the Southern Poverty Law Center (SPLC), a nonprofit that tracks such groups. "I disagree with the allegations and don't have much respect for the SPLC," says John Tanton, founder and chairman of US Inc.

Kidman says he hadn't heard of ProEnglish before it contacted him, nor did he have any idea about the more unseemly side of the association. "What the ProEnglish website spelled out seemed ethical," he says. "If anybody is involved in being racist, I don't want anything to do with them."

It's not only ProEnglish's ties to possibly racist groups that could be problematic: The financing arrangement gives the organization some say in any settlement. "Their interest is in the issue," says David A. Selden, the Kidmans' attorney and a partner at law firm Stinson Morrison Hecker in Phoenix. "It's not a donation to the Kidmans to pay the plaintiffs." Explains K.C. McAlpin, executive director of ProEnglish: "We will not unreasonably withhold a settlement that's in the Kidmans' best interest, but we won't support a settlement where the Kidmans admit to any wrongdoing or one that says the EEOC is right." That could explain why the case hasn't been resolved. As this story was going to press, the two parties were scheduled to meet in a settlement conference, but they remain miles apart on any agreement. The EEOC still wants the policy retracted, an apology, and damages of something less than the legal cap ($50,000 per plaintiff, plus back pay). "We are not trying to put them out of business--not at all," says EEOC attorney David Lopez. He says that the EEOC takes the size of an employer into consideration. "We'd ask for way more money if it was McDonald's or Taco Bell." For their part, the Kidmans demand an apology from the government and $100,000 to cover their legal fees.

Unfortunately, there aren't many precedents for a case like this one (see box), so if the case goes to trial no one knows quite what to expect. The Kidmans take some solace in the fact that Arizona is a conservative state, one with its own English-only initiative in the school systems. But the jury will be carefully picked, and the government will probably select as many Native Americans as possible. As employment attorney Vicki Donati says, "The Kidmans won't get the sympathy factor."

The great irony in all this, says Kidman, is that the atmosphere at R.D.'s is now "heaven." Of the current 15 employees, 14 are Navajo, and eight speak the language, though they're still forbidden to speak it while on the clock. There's a new one-page policy, written by the Kidmans' attorney, stating that Navajo customers may be served in Navajo, and breaks are not included in the ban. Employees are apparently content. The Kidmans say they haven't had to replace anyone since October.

But while things are better at the restaurant, the case has had a big impact on the Kidmans' personal life. They've put off plans to retire soon and pass the business to their kids. Steven Kidman now works for less than minimum wage, and he had to move his family--including a daughter and pregnant wife--into his parents' basement. Still, "We'll go to trial," says Richard Kidman. "If we don't take a stand, they'll do it to the next guy."