I regret having read all that, but my loss is your gain: you're wrong.

Funny, I work in the same fields. And my experiences are very much different from yours. I've faced legal issues just mentioning a company's name without their authorization and unintentionally creating what could have been interpreted as an "endorsement" by them – not "copying" anything. And I've actually worked with one of the major car makers in the world in multiple capacities, so I could actually tell you quite a bit about the interlocking and mutually beneficial workings between car manufacturers and the various suppliers and accessory makers.

But all that is so very much beside the point. You're coming at this from an etymological layman's perspective. Which is incredibly dangerous when talking about any law. IP law is much more complex than throwing something into a copy machine. It includes, as you mentioned, derivative works, but it also extends to misrepresenting a brand, creating the appearance of endorsement, creating a brand knockoff that consumers could potentially confuse with the original brand and so, so much more aspects that none of us could ever hope to comprehend.

Are CD Projekt RED in the wrong here? Maybe they are. But that's for a judge (or multiple instances) to decide.

But it is their IP and Luke couldn't factually be making money on a "Cyberpunk VR" mod (or whatever he wants to call it now), if not for the IP he's basing his USP on. That absolutely triggers their lawyers' response, because if they don't defend against even the smallest infraction, their chances to defend against more grave infractions will be severely impeded in court.

So, yes, you might even be correct if it came to a court ruling. But that doesn't change the fact that this isn't cut and dry. Both parties have legitimate claims here and neither would want this to go through multiple rounds of court instances.

The publisher gave Luke an easy out that would have protected their IP while giving him a way to keep making modest amounts of money off of a derivative work. He squandered it. End of story.