The distributors lost the exclusive right to sell Guernsey Milk after a vote by the States.
Brian Martel, president of the Milk Retailers' Association, said being refused a pay out was unacceptable.
A review by KPMG recommended compensation of up to £1.1m be paid.
However, the department says: "Members remain unconvinced that there is a substantive case for financial mitigation and consider, by a majority, that matters such as these should be settled using the existing legal processes."
Mr Martel said the distributors were owed between £1.7m and £3m as a result of the loss exclusivity.
He said: "What we are hoping will happen in the next week or so is that States members will come around to recognising the cost impact.
"We are hopeful they will come back and discuss something that may go towards being more acceptable than the zero that is currently offered."
Deputy Andrew Le Lievre, a former manager of Guernsey Dairy, suggested a compromise payment of £750,000.
He said: "[The States] has interfered in business with milk retailers, it has interfered in business with farmers. It can't just walk away.
"We have to talk about compensation, these men have lost their businesses or will lose their businesses for sure."
Politicians will debate the issue of compensation next week.
Milk retailers should not be compensated after losing doorstep delivery rights, Guernsey's Commerce and Employment department says.