The music-swapping software company says the fans–banned from the service for allegedly trading the band’s copyrighted songs–say they didn’t do anything illegal.

The fans are fighting back.

Music-swapping software company Napster said today that more than 30,000 of the Metallica fans banned from its service last week for allegedly trading the band’s copyrighted songs online have appealed the move, saying they didn’t do anything illegal.

This sets up a dilemma for Metallica, although the band says it’s received appeals on only 17,000 names so far. Under federal copyright law, the band has to individually sue each one of those people or see them reinstated on the service. And that would be a financial and public relations nightmare.

“It’s not realistic to think that they’ll sue 17,000 users,” said Howard King, the Los Angeles attorney representing Metallica. “From a cost basis alone that would be ridiculously ineffective.”

The move comes as rapper Dr. Dre prepares his own list of Napster users who may have traded his copyrighted songs. The artist will present close to 200,000 names of alleged copyright infringers to Napster tomorrow, asking that names on his list also be banned from the service, King said.

Two weeks ago, Metallica brought a list of more than 317,000 Napster usernames to the company, alleging that each of those individuals had illegally made the band’s songs available for copying online. The move was part of the band’s lawsuit against Napster, in which it charges that the company is contributing to massive online piracy of Metallica’s music.

After examining the list of usernames, Napster banned the names from its service but told its members that if they thought they had been misidentified, they had a right to appeal the ban under federal law.

Napster says more than 30,000 members have taken the company up on that offer, swearing under penalty of perjury that they have been misidentified by Metallica’s online search.

The company now will present those names to Metallica, which will have 10 days to sue the 30,000 members. If the band decides against taking action, the names will be reinstated.

“The fact that so many people have come forward and disputed Metallica’s accusation that they did not break the law demonstrates that this is not a black-and-white issue,” Shawn Fanning, Napster’s 19-year-old founder, said in a statement today. “Napster has employed every available means it has to honor Metallica’s requests.”

Even if Metallica doesn’t take action against the individuals, however, it can use the information in its legal attempt to shut down the young software company.

The ban itself has been fraying around the edges even apart from the appeals, however. Although Napster did create a new version of its software that tracks people even if they try to sign up under a new username, some tech-savvy fans have found ways around the ban and have posted them online.

The company last week threatened to block anyone posting information about circumventing the ban on its bulletin board, angering some of its members.