Our grant application was leaked to a competitor, who is now planning to sue

A bit of background first: we are a young startup who has started getting visibility and traction in a small but very competitive market. In an effort to expand towards a new direction, we applied for a government R&D grant which, somehow, found its way to one of our competitors. As of now, it is unclear how this happened. The most likely scenario is that a founder of the competitor company was selected as the reviewer for our grant application.

As you can imagine, this document contains extremely sensitive information on our technology, market, collaborations and our future plans. Even worse, we have been informed that the company is intending to sue for patent infringement. Now, we are fairly certain that the claims of patent infringement are bogus. The real danger is that engaging a legal battle would drain our resources in a way we can ill afford right now - and our competitor knows it.

At this point, I would like to ask the HackerNews community for your advice and experience. Have you ever encountered such a situation before? How did you react? Any specific do's/don'ts we should keep in mind throughout this process?

My heartfelt thanks for reading this. It's one thing to read about horror stories of legal battles, but it's quite another to have one of them happening to you.