I've been part of a project that received a C&D (LOTR Mod that got C&D'd by Warner Bros). Warner Bros had many demands if they wanted to allow us to continue (change all names to non-copyright, change our Open World Map so it wasn't so close to Middle Earth, change the name of our mod altogether ... and they had to approve all of it; would have been a nightmare, so we simply canceled the project).
Nintendo, from their C&Ds I've witnessed online (admittedly no experience communicating with their legal department), seem even less reasonable then WB Games. From what I've read: they want projects to cease altogether and have no interest in working with fans at all. This project carries the name "Mushroom Kingdom" in it. There's an entire world based on the Mushroom Kingdom and the Mario Franchises, and Mario Levels and Enemies persist throughout the other Worlds as well. You can't just "palette swap" the playable characters, you have to "palette swap" World Maps, Levels, Enemies, change out sound effects, change the name of the project ...
Let's say the Fusion Team received a C&D and the Fusion Team decides to follow with this crazy idea: "Mickey Mouse Kingdom Fusion". How much work needs doing?
- Mario, Luigi, Classic Mario, Classic Luigi, Wario and Waluigi all need resprited and sound effects changed. A lot of work, but perhaps possible.
- "World 1: Mushroom Kingdom" needs re-sprited to become "Steamboat Willy Kingdom". Keep in mind the current Mario Sprites used come from official Nintendo Titles (not like the Fusion Team has been creating all its graphics from scratches). Does there exist Steamboat Willy Sprites in the exact dimensions of 8-bit and 16-bit Mario Titles? The answer is no. Even if they did: that's only ... 44 Levels of Tilesets that need new sprite tiles. Even if all the Levels used the exact same Tileset, that's, basically, more work then creating all the sprite work for Super Mario World.
- All the Mario Enemies need new sprites (and new sound effects). That's, only, +100 Enemies. So basically 1/10 of the +1,000 Enemy Count in MKF. That's, probably, 5x the number of enemy sprites in Super Mario World.
- What about all the Mario Game Music used? That's roughly several dozen tracks that need replacing.
- Wait, Nintendo owns other franchises BESIDES Mario and could C&D for the other game franchises used in MKF? They could sue for the usage of the Zelda, Metroid, Pokemon, Kirby, Punch Out, Smash, and probably a dozen or more other franchises that are referenced in the form of Levels, Enemies, Music and even Worlds!? In fact, I'd say half of franchises referenced in MKF are from Nintendo. Now let's multiply all the previous work by, roughly, 5.
You're, effectively, asking for the Fusion Team's "C&D Backup Plan" to be redoing the majority of Worlds, Levels, Enemies, Music and Sound Effects to a 1920's Steamboat Willy for a project that's been in (and out) of development for 17 years! Does that seem so easy to you!? That's not even touching your other "suggestions" for retheming over Worlds outside of Nintendo.
Sorry if I seem a little aggravated: Replacing graphics is not just something that takes a couple clicks. That's YEARS of work for even a professional paid development team. No, you want to know what the options are for a project this size? I know this from experience from working on a fan project based on an IP: there's only 2 realistic options.
- Cease development. The modding team I was on tried fighting WB Games. They even got a Pro-Bono Lawyer offering to help us. WB did offer us a deal when we came to the table with a lawyer, but (as I mentioned at the start) it would have required complete oversight and us redoing huge swaths of the mod. Nintendo is even bigger then WB Games: the biggest Game Developer on the Planet. Even if the Fusion Team could find a Pro-Bono Lawyer offering their services, you're talking a Legal Battle that could take YEARS! And, likely, end up costing in the Millions to realistically fight. And if the case got that big ... other Game Companies represented in MKF would likely come a-knocking.
- Ignore the C&D and continue development. Pray Nintendo doesn't follow through with the C&D. The ultimate question then becomes: is Nintendo willing to follow through on a C&D? A C&D is not a legal injunction: it's a warning. Would cost them some time and money to follow through with, and (potentially) a reputation loss that could hurt them financially. Personally, Nintendo seems happy throwing around C&Ds and I do think they would be willing to sharpen those legal fangs.
What happens if the Team chose 2? I don't know where the other Team Members are in the World, but different countries have different laws about IP. Countries not allied to Japan or America are going to be harder to extradite for. If a Team Member is in, say, China: that Team Member is likely safe. China rarely gets involved in Copyright Laws of International Companies: that's why so many knock-offs persist there. If you're in America, Canada, Australia, New Zealand or an EU Country (I'm imaging the grand majority of the Team lives in): you're a target by Nintendo to be sued.
Me? I'm in one of those countries. Certainly not putting my own personal life at stake for a fan project, and I doubt most on the Fusion Team are willing to either. Sorry, but your 2 cents are not going far in this discussion I've had with many people over the Internet (about C&Ds of fanworks).
Best we can hope for: MKF is never threatened a C&D before v1.0. What happens in v1.0? Source Code is planned to be released. Say MKF is given a C&D after Source Code is released, what then? I can tell you what can happen: lots of projects by other Teams outside the Fusion Team can come into existence and Nintendo is going to have a rough time C&Ding those other projects. That's the power of the Internet: the power in many.