It was likely inevitable that Epic would launch a stout countersuit of Silicon Knights with regard to the Unreal 3 Engine issue. GameDaily.biz is reporting that such a suit has been filed, and makes a number of references to the text of the suit and the motion to dismiss Silicon Knight's suit without posting the entire text publicly.
This is, however, also pretty common in the legal world, just as Silicon Knight's original claim is relatively common in the realm outside the game industry. From what I have read, Epic is counter-claiming that Silicon Knights has has everything to gain from seeing the Unreal 3 code, and moving to dismiss based on their assertion that they wanted Silicon Knights to succeed as that would lead to greater income for Epic. This first issue touches on one of the most complex issues in the industry, whereas the second seems mildly flawed.
The first issue is about code, and it exceptionally complex. Code can be copyrighted, and it can also be patented (sometimes), and it can be protected by trade secret provisions. Much of this will come down to comparing the Unreal 3 and Silicon Knights engines, and the analysis will certainly be complex. In fact, it's so complex I'm not sure I can adequately explain it in the blog. To far over-simplify the matter, depending on how it is protected, different aspects of the engine are protected (the code itself, the idea of the code, the specific method, etc.), and the comparison will determine if Silicon Knights gained an unfair advantage by seeing the Unreal 3 code.
The motion to dismiss claims that Epic would profit from Silicon Knight's success, which is true. However, there is a fault with the argument. Epic would probably always profit more from selling their own game (Gears of War) than the small royalty/license fee they would get from any Silicon Knights project. Moreover, if you imagine that the game buying public can only expend X dollars per season, having titles that all profit Epic compete is bad for business. This is a little complicated as an example, so bear with me.
Say in Universe A, Gears of War and Too Human were both out last holiday season.
Say the average 360 owner can afford 2 titles for the holidays, and that both Gears and TH scored a respectable review of 9.5.
Many people will buy one, or the other, but not both. Why? There are many, many other games available.
Say in Universe B, Gears came out last year and TH was pushed to, say, June.
Say the average 360 owner can afford 2 titles at the holidays, and one more by June.
Many people will get both (especially given the summer drought), and Epic will likely see more total income as they are not having two Unreal 3 products in the market launching at the same time.
It's not an all-encompassing example, but it shows the basic element of the flaw. Competing against yourself isn't good for business.
Also remember that this case could end up with rulings for both parties, which typically offset each other to some extent. They may both owe each other money when the judge hits the gavel the last time. It will certainly be interesting to see who walks away with what as a result of the suit. There's also a distinct possibility of a settlement, as most cases never actually make it to trial. We will have to wait and see what Silicon Knight's next move is in this legal battle.