Google (in particular YouTube) has 2 options.
1. Pay to license h.264 (or some other proprietary codec) 2. Release alternative and competing codec and do battle in the court room.
Both options were going to require spending money so they're going with route 2 which is likely the better long term option. There's also a good chance they can get some other heavyweights to back them in support.
Google is playing for control. Likeliest outcome of VP8 being found infringing is some cross-licensing deal and new patent pool with Google as major stakeholder. They would thus have significant control over the resulting VP8 license costs vs being "just a customer" to the h264 group. Having a compete product thus acts as a powerful check on h264 licensing too.
Google is simply trying to ensure that its business isn't held hostage by someone else. Either they win and no-one controls video, or they 'lose' and Google at least gets a hand on the wheel.
How will this pan out I have no idea, but the closest thing to a resolution that I see is Google will try to make MPEG adopt VP8 or the whole WebM in some way and join MPEG LA.
Of course they could be hoping to fight the patent allegations and not lose, but I doubt that Google have become so carelessly cocky.
If you launch or join attack against VP8, either directly or by proxy, for next 20 years (or however long it takes to VP8 patents to expire) you cannot ship anything that wants to play VP8 video.
For most H.264 patent holders (not MPEG-LA, think Hitachi, LG, Panasonic, Samsung, Sony, Toshiba...) that could be a problem, if VP8 is successful. Would you want to be CE producer and unable to play Youtube?
So they can sue, but it will be an ugly battle, and unlikely to finish before the H.264 patents expire. It's really not a good idea.
I presume you mean MPEG-LA hold patents over VP8? Which? Also if the reverse is true, why aren't Google having MPEG-LA pay them license fees? Or, perhaps that is what's going to fall out of all this now.
In any case I think all of this clearly shows that the MPEG-LA are all about controlling the web and squeezing every cent out of it possible contrary to their apparently lax attitude [until 2012].
On the other hand, if MPEG decides to sue, Google will do a counter-claim, refuse to settle, and the thing could easily be tied up in courts until all the relevant patents have expired.