Some 100,000 passengers were affected after a series of flights were cancelled or delayed over the summer when cabin crew and pilots went on strike.
The CAA found the strikes were not "extraordinary circumstances" and therefore the airline was not exempt from compensation rules – despite Ryanair's claims they were.
The watchdog has now said thousands passengers are entitled to some kind of compensation under EU law.
Passengers should be able to claim compensation if a flight is delayed for more than three hours when flying from an European airport or with an EU-based airline.
They can claim compensation up to €250 (£229) for short-haul flights and €400 (£367) for mid-haul flights and €600 (£530) for long-haul flights.
But their claims have been rejected by the airline and Ryanair will now face legal action in court.
Ryanair's flights were hit by widespread strikes over the summer by the carrier's pilot and cabin crews, while it also suffered amid the industry-wide air traffic control industrial action that saw thousands of flights cancelled across Europe.
Staff walked out for 48 hours in a dispute of pay, working conditions and pensions.
The CAA said: "The UK Civil Aviation Authority has today started enforcement action against Ryanair, following the airline's decision that financial compensation is not payable under European Commission Regulation 261/2004 for flight disruption resulting from industrial action by the airline's staff this summer.
"Ryanair passengers have made claims for compensation directly to the airline, but these have been rejected.
"Passengers have then been able to escalate their complaints to AviationADR, a body approved by the Civil Aviation Authority, to provide alternative dispute resolution for passenger complaints.
"Ryanair has now informed the Civil Aviation Authority that it has terminated its agreement with AviationADR.
"As the Civil Aviation Authority said at the time of the industrial action, in its view, the strikes were not 'extraordinary circumstances' and were not exempt, meaning consumers should be compensated in accordance with Regulation EC261/2004.
"As a result of Ryanair's action, passengers with an existing claim will now have to await the outcome of the Civil Aviation Authority's enforcement action."
Rory Boland, Which? Travel Editor, said: “Customers would have been outraged that Ryanair attempted to shirk its responsibilities by refusing to pay out compensation for cancelling services during the summer – which left hard-working families stranded with holiday plans stalled.
"It is right that the CAA is now taking legal action against Ryanair on the basis that such strikes were not “extraordinary circumstances” and should not be exempt, to ensure that the airline must finally do the right thing by its customers and pay the compensation owed."
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