After the opening of the Pearl Street Station, Edison underwent a series of legal and market battles. The first of these was with the inventor Joseph Swan, who filed suit against Edison in 1881. Swan claimed that he had prior claim to the ideas Edison utilized in preparing his lamp, a claim that was almost certainly true, but Edison was the one who produced a practical version of this lamp. All the same, a court victory was uncertain, and Edison went to Swan with a settlement plan. In 1883, the two inventors created Edison and Swan United Lighting Company, Ltd. In 1886, the British courts upheld Edison's basic carbon filament patent, keeping competitors from initiating legal actions of their own. This victory gave Edison and Swan United a near monopoly on the business until 1894.

A number of other competitors filed suit against Edison between 1885–1900 after the U.S. patent commissioner ruled that another inventor had established precedence to an electrical lamp with carbonized paper. The Edison group spent almost $2 million defending itself in court. The protracted legal battles drained the company of capital and kept its focus off of inventing for half a decade.

The most important battle began in 1885, when Edison's group filed suit against the United States Electric Company and George Westinghouse, for infringement of the carbon-filament patent. After complex and difficult legislation, the courts eventually upheld Edison's patent in 1891 and again in 1892. Instead of giving up, Westinghouse quickly set about battling Edison in a more effective way: in the marketplace.

Westinghouse was a self-taught electrician and inventor whose primary inventions lay in train technology. Among other things, he had invented an air brake for trains in 1869. He became Edison's primary rival in 1886, when he built the first commercial AC system in Buffalo, New York.

Westinghouse began developing this system in 1885. He was disenchanted with Edison's system, the direct current system (DC), which had distance limitations because voltages could not travel far on a line without losing power. Edison's system was most useful in densely populated urban areas. Westinghouse envisioned a long-distance transmission system with alternating current, or an AC system. He created one with a new transformer that reduced high transmission voltages of up to 1000 Volts to safe levels by reducing voltages at substations along the line.

Edison's DC system transmitted voltages at only 240V, but he contended that his was the safer and more effective system. As AC systems rapidly gained market share, a nasty public battle ensued over the safety of Westinghouse's system. As AC system voltages were used for new electric chairs and to kill cats and dogs, Edison turned his crusade against Westinghouse into a crusade for public safety. Meanwhile, Westinghouse concentrated on developing the system devices that would make his AC system dominant in the field. He also took advantage of special opportunities to publicize his AC system, such as the famous "White City" exposition at the Chicago World's Fair in 1893.

Ironically, the people who paved the way for Westinghouse's AC system to become the dominant electrical system in the United States were former Edison employees. One of these, Nikola Tesla, was a Serbian electrical engineer who came to the United States to work with Edison in 1884. He left the Edison factory to develop his own inventions and is credited with inventing the polyphase induction motor, a device, which allowed for long-distance application of AC electrical power. The other invention was a rotary converter by Charles Bradley, another former Edison employee. The converter was patented in October 1888 and combined elements of the AC system with the DC system, making it possible to connect high-voltage transmission lines to the DC central station and distribution networks. Thanks to these inventions, plus the hard marketing work of Westinghouse, AC systems were America's primary electrical distributors by the 1920s.

Edison learned in the mid-1880s that he could be on the losing end of court battles and market share despite his winning streak. Once again, this was a valuable and painful lesson about the business world that he applied to his later inventions. From the battles with Joseph Swan, Edison learned that patents were invaluable, but only if they established precedence over the idea as well as the product. He also learned that settling out of court could save time and money for both parties.

The battles with Westinghouse introduced Edison to the fight for market share in the most ruthless ways. As he had learned from his experience with Alexander Graham Bell, a patent for a commercially successful product could be circumvented if an inventor could improve on that product in a new and unique way. To be on the opposite end of that principle, however, was a shock. And unlike his experience with Bell, the courts did not save Edison from losing the competition. The public made the final judgment on AC vs. DC systems, and Westinghouse was declared the winner.

To his credit, Edison fought a grim and tenacious battle against Westinghouse. And while he was most concerned with preserving his own market share, he was very concerned about the potential public hazards of using such a high-voltage system. His press packets on the danger of AC systems contained truth, and he would eagerly demonstrate his points for the press by using high voltages to electrocute stray cats and dogs in the Menlo Park laboratory. At the very least, Edison's loud protestations for public safety forced Westinghouse to take comprehensive safety precautions in developing his AC system on a large scale.

The defection of Edison employees brings up another point about Edison's behavior as the chief inventor at the Menlo Park laboratory. While Edison emphasized a non-hierarchical structure at the laboratory, he was very careful to make it clear that all inventions at the Menlo Park laboratory belonged to him. Employees were not encouraged to make their own inventions and file their own patents. While this arrangement was crucial for infringement concerns, it discouraged many talented young inventors. They grew frustrated with the rules at Edison's laboratory and struck out on their own, often creating devices that helped Edison's competition.