I would assume this is supposed to defragment files that have at least one fragment smaller than the given size; instead of which it is only defragmenting files that are in total smaller than the given size.
For example, I had this option selected with 100MB as the threshold. I had a file with 4 fragments that was slightly over 312MB in size; therefore at least one of those fragments must have been smaller than 100MB. But Defraggler did not defrag the file. Experimenting with the option, the file was not defragmented when the threshold was set at any value up to and including 312MB, but was defragmented when the threshold was set to 313MB, i.e., when the whole file, rather than any of its individual fragments, was smaller than the threshold. I have had similar results with other files of different sizes.