Am a few weeks behind on threads, so am joining the discussion on this now, but here's my take.
There can often be fine lines between ripoffs and homages/tributes. If one wanted to be ultra-technical, any use of the Muppet characters not authorized or done by Disney itself can be construed as illegal...from unofficial websites to fan art/fiction, etc. However most stuff like the things in the last part of that sentence are fans paying tribute to their area of fandom, and not doing it for any kind of monetary gain. Disney/the Muppet staff/Henson et al usually consider it flattering - we can all breathe easy when people like Jim Lewis and Steve Whitmire say they not only read but love the fan websites and no one has to worry about Disney lawyers giving them **** for paying tribute to the thing they love.
Youtube starts to get in a "sticky" area since people that post clips aren't making money off of them, but they can be considered competition for an in-print dvd that has the same material and can be construed as siphoning money that people might otherwise spend on said dvds who can view the material for free away from the rightful copyright owners. Because this is a thorny issue, different companies/artists have taken different approaches with some banning and being very active about policing the video share sites and others like Disney/Henson maybe a little too lenient (it's nice that they've been pretty generous and generally turning a blind eye, but there really are a LOT of stuff on YouTube that really shouldn't be there given that they're directly off of dvds on the current market)
Then there's things like the Vault of Puppets replicas that clearly step over the line because not only are they making a profit on a very-directly copied product, but also large sums of money (with some puppets fetching a four-figure price tag), pulling funds/customers away from an existing official line of similar products (Master Replicas' posers), and very brazenly selling them in ways that make them seem like they are actually approved by Henson/Disney.
Now the sad part is that whoever was builing these puppets (whether it was one person or a team) had to have been a fan at heart as they cared enough to know and study the basics and while many likenesses weren't perfect, several were far better than any other puppet builer not working for Henson may have been able to create and no doubt they started on the road to making Muppet likenesses as a personal challenge project and after getting good enough at doing it, crossed the line and came up with the idea that they could sell these in a very public fashion. Instead of taking that amount of talent and dedication and seeing if they could perhaps manage to get in the door as an actual puppet-maker with Henson/Disney (yes, i am ignorant of the person's actual background as maybe he actually WAS at one point...wouldn't be surprised to find they were at one time and went "rogue"), they chose to not only sell them to the public (mistake #1), but to do so at very high prices (mistake #2), and in places like Amazon that are high profile and generally thought of as only selling genuine product and not bootlegs (mistake #3) and often making it seem like these were somehow authorized/approved/otherwise "okay" (mistake #4), all the while doing so while as mentioned, Master Replicas was trying to sell similar projects in the same places that were officially approved (mistake #5), and were no doubt a major factor in the downfall of that line (note i said "a" factor and not "the" as obvious MR had lots of other problems as well, but this certainly did not help them at all) This guy crossed that line from tribute to aggressive unauthorized competition - and with any lack of graciousness or modesty; part of this guy's downfall was his hubris - it was like he was practically waving red flags and daring someone to sue him. And of course the lawsuit would be the next step in a series of previous actions - we all know (since many here were responsible for them) that he was contacted by several people telling him "dude, what you're doing is totally not cool and you're asking for trouble", and i'm sure that before a lawsuit was filed, he was most likely asked a bit more "nicely" by Henson/Disney to stop what he was doing probably in the form of "cease and desist" communication which were obviously ignored, and then given that he still plowed ahead despite various warnings, then the lawyers get involved.
So as i said at the beginning of this post, there's always often that line between tribute/homage/respect and ripoff/deception/illegal competition ... and while things like Youtube might be a bit more blurry of a line that seems more like a "half-full"/"half-empty" personal opinion test, this person was not only quite brazenly clearly stepping over the line, but practically tap dancing and pole vaulting (no pun intended) over it and once over it, looked back on the line and spit on/spray painted graffiti all over it. That's the difference between what this guy was doing and people on this forum that experiment with building their own personal Muppet puppets for their own enjoyment/hobby and experimenting with the art and craft of puppet-building.
One final note that should be mentioned that no one has brought up yet is that another thing that made what this guy did wrong was that in selling his product, he was giving other people a tool by which they could then do whatever further major copyright damage with. Yeah a Youtube video that duplicates something in print on an official dvd may take money away from the makers of said dvd, but the person on the other end downloading the video isn't going to cause much harm other than enjoying the video. Any of this guy's customers could have taken the bootleg Muppets and used them in any kind of capacity that could further damage Henson/Disney...once sold, the buyer has a tool with which he can do who knows what with - he could go around trying to pass themselves off as "Miss Piggy's new performer" and get paid to do a paid appearance (hey most people know Frank Oz doesn't do as much Muppeteering but most also wouldn't know the name of who does or what they look like). This is exactly why MR was only allowed to make poser replicas and not actual puppets that could be performed and why the FAO S Whatnots won't resemble any actual previous Whatnot characters with the available choices of features. Instead of selling something that was going to provide personal entertainment to a buyer, he was giving the buyer a vehicle with which they could do further harm with. (Mistake #6)