Nintendo is suing them over patent infringement, not copyrights, which is whats making everyone confused. Everyone was expecting Palworld to get sued over copyright, under the assumption that the pals kinda look similar to Pokemon. Instead, theyre getting sued for gameplay mechanics.
Its pretty tough when they release a game that took so long to develop, that was meant for an era of gaming when live service games were hot. Now that a lot of live service games are flopping due to over-saturation, I think even Sony saw it wasn’t worth the effort of trying to push the game further without either reworking it into something else, or just cutting their losses.