Legal Question in Intellectual Property in California

I'm going to give you a somewhat cautious answer, because there may be facts in addition to what you've mentioned in your post, which I understand cannot give names, etc. under LawGuru rules anyway. My tentative opinion is that the attorney and the client are unlikely to prevail, and in particular would not be entitled to attorney fees.

A statement "reserving" the right to sue seems procedurally meaningless. A plaintiff, or its attorney, either has a "right" to sue, or does not. Reserving the right by sending an e-mail to a prospective defendant does not waive or toll the statute of limitations, or give standing to sue to one who lacks it, or give credibility to a frivolous action.

Further, any damages would be too speculative, I'd think, to be awarded under standards for proof of damages; at most, the plaintiff might be entitled to an injunction.

However, having said all this, I think you should have a face-to-face discussion with a local intellectual-property attorney and/or send me some particulars by e-mail, privately. Among the factors that could cast a different light on things are the sophistication and experience of the attorney or law firm making the threat, the name itself, the connection between the name and the prospective plaintiff, the type of product or service offered by each of you, whether your service makr application is Federal or California, and a few other possible issues.

Please feel free to contact me directly with details. I am currently handling a business-name conflict case.