The lawsuit, filed on Wednesday, accuses Bishop Gerald Barbarito and the diocese of cutting off communications with Rev John Gallagher after he notified police that Rev Jose Palimatton - who had recently been transferred to the diocese from India - had shown child pornography to a teenage boy.
After confronting Rev Palimatton, Rev Gallagher claims that the priest admitted to the incident and also told Rev Gallagher that he had abused children in India.
Rev Gallagher reported the crime to the police and Rev Palimtton was arrested the following day. He was later convicted and jailed.
Rev Gallagher says that diocesan leaders then called him told him the normal procedure would be to put Rev Palimatton on a plane back to his home in India rather than contact law officials.
The the 23-page lawsuit, Rev Gallagher and his lawyers claim that the diocese demoted him, removed his belongings from the rectory at Holy Name of Jesus Church and changed the locks so he could not get back in.
The Catholic priest is suing on the grounds of libel, claiming that the diocese posted a statement on the diocesan website last year that said Gallagher was "blatantly lying" and "in need of professional assistance" for claiming church leaders had told him not to go to the authorities.
The Catholic priest said at a press conference yesterday that he decided to sue the diocese because he was seeking: "vindication and clearing of my name. I did what was right. I upheld the law and I followed their law. And this is how I've been treated."
The lawsuit accuses the Diocese of orchestrating a cover-up and a campaign of intimidation, slander and libel directed at Rev Gallagher.
The lawsuit states that: "What has happened to Father John Gallagher shows without question that the Catholic Church has learnt nothing from its history and continues to cover up acts of priest paedophilia even at the expense of its own priests and that a priest who cooperates with authorities to prosecute child sexual harassment will suffer at the hands of his own church."
The Diocese says it will defend the defamation case and re-issued a statement from last year.
It reads: "The Diocese of Palm Beach acted in a prompt, thorough, and cooperative manner in regard to Father Palimattom. Father Gallagher was not in any way demoted or removed because of the incident.
"He was not named as pastor of Holy Name of Jesus Church for a number of reasons not related to the incident involving Father Palimattom. He was given a new assignment with all the reasons explained to him."