IMHO, SK is completely right in claiming that damage has ben inflicted to them. Only question is will they be able to prove it in that manner that is obvious that law is broken.
Why I think that SK is right?
The best example is Dark Sector.
This game was announced when PS3 was. It has been developed by Digital Extremes. DE is to Epic what Splash Damage is to id (or at least something like that)- in other words they're or used to be very close companies.
If you take look this gameplay trailer:
http://download.gametrailers.com/gt_vault/t_darksector_e32k7_elementalcarnage_gp_gt_h264.wmv
You'll see extremely similarity with other "behind shoulder" UE(3) based games. Blood shader is peculiar 'cos it's so resembling with GoW, Turok, and Army Of Two:
http://download.gametrailers.com/gt_vault/t_armyoftwo_e32k7_duckcover_gp_gt_h264.wmv
AoT is so GoW-alike it's amazing. It looks like UE3 is really tailored for "over the shoulder" games, and games like TH and LO are simply put aside. In other words UE3 is all but not flexible engine as it was firs impression.
Let's get back to DE. They're claiming that they're using completely "in-house" build engine - Sector Engine. But if you take look at the trailer, and you know the history of this company and the fact that they only have experience with Epics' stuff, then is not hard to conclude that Sector Engine is really "biffed-up" EU2(.5).
I'll remind you that Ubi is using UE2 for long time and doing they own enhancement, but also using some Epic's tech. But at the end of the day SC"DA is using engine that they call "Splinter Cell" Engine! And if you open some of their shader definitions you'll see bunch of references toward EPIC's code.
So basically, it's posible to use Epic's tech and to call it your own, but that depends on Epic's interests and good will. Mine guess is that SK was trying to invoke good will inside CliffyB and Mark Rain, but they failed, so they've decided to sue them. And they have good chance to win!