EVEN AT THE RISK of earning the ire of some irritable member, I shall cuts the Gordian knot and go straight to the crux of your question: Is it "Defendants Smiths' argument" or is it "Defendants Smith's argument"?
It seems to me quite obvious that since the entity in question is already 'the defendants Smith' as in the Brothers Grimm, the possessive form would need to be Smith's rather than Smiths' because you have already committed to use Smith rather than Smiths -- it should therefore be
the defendants Smith's argument / contention / appeal etc
Once you have decided to use the defendants with Smith, the form Smiths' is automatically invalidated, IMHO, unless you are willing to be inconsistent with your spelling / punctuation! The only way to use Smiths' here is to drop 'the defendants' and just say the Smiths' argument, etc as suggested by the learned member jlovegren in comments.
(Legal disclaimer: Notwithstanding any advice supplied by any member of this website, you are expected to check with the competent authority in legal writing in your jurisdiction before choosing where to place your apostrophe, at your sole discretion and responsibility.)
Please note:
both possible forms you presented, the defendants Smith's and the defendants Smiths' will sound exactly the same when spoken;
it is quite an awkward construction either way and I would 'strenuously' advise you to use the form "of the defendants Smith" as already suggested by the learned member aparente001 in comments;
I am sure the Honorable Judge won't mind where you put the apostrophe unless he/she is a senior member of EL & U!