The idea goes kind of like this: people are rational creatures. When dealing with acts for which they could be punished, they make decisions based on how big the possible punishment, and how likely they are to be caught. For some acts, the likelihood of being caught is very high, so the punishment doesn't need to be very high to dissuade people. But with file sharing, its the other way around. The chance of being caught is very low, so the system has gravitated towards very large punishments.
But even with this, the chance of being caught is really, REALLY low. So low that the possibility of being sued never enters into people's minds. What's probably needed is to take this out of the hands of privately driven law enforcement and put it into the hands of the government. If file sharing were more like speeding, where file sharers who didn't earn any money from their acts were caught after every few files uploaded and issued hundred dollar tickets for each offense, the regular people who post things to file sharing websites would probably stop. And the result would probably be a lot more fair all around. I'd want to preserve the private option for companies who feel that they really have been harmed financially to the point where a lawsuit would be a fiscally responsible decision (is WotC really making money no this? Probably not, its probably for intimidation of future file sharers), but for the day to day stuff my system would probably work better.