The problem arises when a company looks to abuse its trade mark rights and prevent usage of other brand names which to most reasonable people would never actually be confused with the trade mark owner's brand.
I always want to be in the underdog's corner, but I have sympathy with Instagram here I must admit. The origin of 'gram' is irrelevant. The fact is that we are dealing with two apps with very similar functionality, who both share the word 'gram'.
On that basis, I think there is a high likelihood of confusion in relation to the origin of the app. There's a decent chance that a certain proportion of the relevant population could think that Littergram is an official offshoot of Instagram.
It's also likely that the name was also chosen to free-ride off Instagram's goodwill to attract attention to the app.
To be fair though, he has got good publicity for the app as a result of the cease and desist, which if he hadn't named it Littergram he would never have got. I doubt Instagram would pursue a damages claim and so both parties can presumably walk away if he changes the name.