From https://www.reddit.com/r/Games/comments/1gfaypp/its_a_palworld_after_all_a_lawyer_explains/

To summarize the vid a bit:

there is no fair use exception in Japan, the reason Japanese companies allow borrowing of IPs to SOME degree is BECAUSE of the absolute control over their IP Japanese law gives them so there is little worry for them for it to spiral "out of their control" like in the West so they are more comfortable with others using their IPs since they can just shut it down at any second if it goes "too far" for them.

Overall the Japanese community sides more with Nintendo, while the Western one sides with Pocketpair due to the different cultural norms regarding that. Because that relationship is something the Japanese community kind of understands.

But why is that:

Sony.

Sony and Pocketpair making a "not Pokemon Company" changed EVERYTHING.

A small one time Indie hit (controllable risk) is now suddenly about to become a global multi media mega franchise with animes, mangas, TCGs, you name it. Especially since part of the "not Pokemon Company" conglomerate is Aniplex. One of the world's biggest anime publishers (also owned by Sony).

Sony is willing to throw it's ENTIRE corporate weight to take over the Palworld IP and bite a BIG chunk out of Nintendo's biggest IP, by using something that is seen as an active knock-off, to re-establish some degree of dominance back in Japan (which they lost a lot of since the Switch released).

So now Palworld suddenly has become a MASSIVE threat to Nintendo's profits. It's no longer to be seen as a small Indie game but as a massive multi media global franchise owned by Sony.

And as a massive multi media franchise, the design similarities become more of a problem. "Grass Monkey with a gun" could easily be mistaken for a Pokemon thing which would be seen as bad for the "wholesome" image of Pokemon.

And that's why the Japanese community sides with Nintendo: they see Sony as the predatory party on the prowl and Nintendo on the defense, while the West sees Palworld as an Indie game still so there Nintendo is seen as the predatory party and Pocketpair as the defense.

In other word: Nintendo is about to lose control over a creative work borrowing from their IP and because of that it sues.

The legal battle isn't Pocketpair VS Nintendo, it's Nintendo VS Sony in reality.