As you're doing little other than squatting, I can't see their being much mileage in taking the dispute further - You may have more luck if you turn it into a fansite (an claim this as your intention all along).
The individual concerned has not automatic right to the domain, by ICANN will not look kindly on you in any dispute if it's blatantly obvious you're just holding out for cash.
Make a fansite, and the offer may increase by a large amount - at the moment, they're just offering nuisance change, as that's all it is.
Do it.