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In some ways Nintendo suing the original project was a good thing. It brought the project to the attention of a lot more people. Now there is a new version with a bunch of bugs fixed. Who knows how many new developers will be working on it now.

I have to think Nintendo knew this. They had to defend what they could and did so because the original project actually seemed to be doing some sketchy stuff. They know they can't stop everything though.

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I think it's pretty clear that if they felt that they had a case against emulation as a whole, they would have brought down the Dolphin project. As it stands, the worst they've done is gotten it booted off Steam, but I can happily still download it from their website. The Dolphin project has been around in some capacity since 2003, while the GameCube was still relevant, and had more-or-less decent Wii Emulation in 2009 as well; by all accounts in 2010 Dolphin was directly competing with "real" Wiis (while offering proper HD output no less).

I'm sure Nintendo's lawyers were perfectly aware of Dolphin pretty early on, and if they felt that there was any case against them then they would have done something.

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