TSR (and Gary) were zealously guarding the IP, because at the time it was perceived that any infringement not addressed automatically made it public domain. Given the popularity and profitability of D&D, they couldn't take any risks, even though it really hurt their PR. At the time there were numerous D&D ripoffs that tried to ride the waves of D&D's popularity, and TSR's lawyers warned them it's better to be careful than lose any potential IP.
Looking back it's somewhat understandable, since we have the internet. Not only could individuals look up the IP laws to see what's permitted and what's not, but the company can address the situation more easily to the fan base. Back then you had a handful of magazines... and that was it, other than the occasional word of mouth at the annual GenCon. Could it have been handled better? Yeah, but I don't blame TSR's actions in retrospect*
*at least with this... I still blame them for a lot of other things