Max, I'll refrain from saying "you should" because 1) it's your ass, and 2) I'm no expert. Some possible good ideas:

Lawyer.

If you want to escalate, I'm sure they'll play along.

Publicity does wonders. You could make a public written statement of the facts only, and send it to Sing Out! and other folk and general music publications, various internet newsgroups (I'm willing to post it for you if you want.) There are loads of folkies who are probably unaware of this threat because they only access the DT and don't ever read the forum. Caution: this may fall into the heading of "escalation."

It seems to me that if you have a license with BMI, ASCAP, or whomever, and the artists complaining (if there really are any) have registered their copyright with those organizations, they may be up the creek sans paddle.

If anyone wants to read the actual copyright laws, they're here

See also House Approves Digital Copyright Legislation Got a phone number for the American Civil Liberties Union? They have layers. :-)