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Here is what I would do. Sell them the domain name. Find out how much it would cost them to take you to court and sell the domain name to them for 75% of what their lawyer fees would be to them. Your out of a lawsuit, can get alittle publicity that you settled with them and what the new domain name to your site will be because of the settlement and you've made a extra buck.
I have had friends do this and come out looking pretty good. I had one friend get $150,000 for a domain name that he was orginally going to get sued over, but instead turned it around, that they would be better off paying him for the domain name, rather than paying their lawyers to take him to court.
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