The thing is they can't afford to argue, The team knows they have some laws and precedents on there side. Regaurdless square has unmatch resources that pretty much nulls everything they've got.
What can't they afford? SE can't afford to take this to court, because they know it is baseless. They are just sending out empty threats in order to scare people and keep them in line. Also, as I said before, do they actually think that it's a stand alone release or do they know it's a patch? If it's a patch, there is nothing they can do about it.
I definitely say that it should be expressed to them what the project actually is and what it is intended for at least. If there is no response, I would say get some free legal advice from a lawyer and they might even tell you that their C&D is baseless.
The point here is that there will be no court date, there will be no fighting it on SE's part. They are just throwing out an empty threat and they have no authority to stop you from releasing a patch to a game.
Seriously, there are countless games out there for the PC and for SNES emulators where patches or modifications similar to these are released all the time and they are perfectly legal. The problem seems to be that SE thinks that these games are being made as stand alone projects and they are in turn passing out illegal copies of a rom in a modified state.
They could state that they have not authorized people who have a copy of the game to have a ROM image of the game as well like I believe a few companies have already done so. In that case, they still can't tell you to not release a patch to that ROM as the patch itself is still not illegal, only the ROM image itself would be.
Not everyone can afford a few years of litigation and court battles -- not because it costs money, but because it costs time. Imagine they lose the first case and have to appeal? Or they win and Square Enix appeals? Then it goes to a higher court and so on. Even if we win, Square Enix could drag this battle on for years, ruining both Z and Agent 12's chances at living a normal life by setting them back several years in employment and job advancement.
Seriously, what do you tell your next employer when you have to explain a sudden 7-year gap in your employment history? What do you tell the girl you were going to move in with and start a new life with? Hell, just what do you tell your current employer? That you were fighting for the essential human right to modify video games and save the Internet?
Also, what makes you think they can't start a dialog with Square Enix without involving the court? Of course they can -- everyone likes to settle things before having to make everything public and pay court costs. Hell, out of court we'd probably be able to get a somewhat favorable outcome with clearly defined stipulations much more quickly than if we spent years in court fighting tooth and nail over everything.
Besides, this is a highly dynamic, complex situation that's changing daily. Who knows what's happened since this news post was made?
If you really want to help, quit playing wannabe lawyer and find a real, experienced Intellectual Property lawyer who would care about this issue and could give Agent 12 and Z more helpful advice on how to take a stronger position without incriminating themselves.
Or just go spread the news, but quit giving the same legal advice we get from 12 year olds and middle age guys still living in their mom's basement.