The libel case began in the High Court following the publication of a report by Newcastle City Council in which it ignored the verdict of an earlier case in 1994 and drew its own conclusions about nurses Dawn Reed and Chris Lillie.
Ms Reed and Mr Lillie said the 1998 report and press coverage surrounding it caused them immense personal distress.
Their solicitor, Richard Osborne, suggested that either the council had lost control of the review team or it had been traumatised by earlier cases into seeing paedophiles at every turn, 'with disastrous consequences for the accused, as well as the parents and children involved'.
A council spokeswoman said the council was 'fully and robustly' defending the position taken in the report, which was commissioned following the nurses acquittal at the direction of the trial judge in 1994.
She said: 'We intend to prove that what we did at the time was justified and that the report's contents are accurate. We intend to win.'
The council is co-defending with the Newcastle Evening Chronicle, which ran a high-profile campaign against the claimants.
The case is expected to continue for three months.