Great points, but those are all based on generalities and not the specific facts of this situation, this client, this developer. My comments, for the record, were of that context.
In general, I completely agree with you, and if you feel the principle at stake is more important than reputation and money, I understand that.
But one has to eventually rationalize their situation. In this case the client is such a a$$hole, the developer should get out and keep distance - this client is the type that makes a mountain out of a molehill, meaning they're more likely to want the developer to spend money on a case - even if they win. The point being, to drag them into court, create a record, add a complaint to the BBB even if unjustified, and just spew on them for the sport of it. Remember, this is the client who didn't sign a termination agreement, made demands without any legal basis, and went with the cheapest competitor anyway.
-jim