It looks like a legal dispute that's been ongoing for well over a year that hasn't been settled amicably and is now going to court to me. Yes, I think that CryTek would be annoyed if they did a whole bunch of work at reduced cost for someone on the agreement that they both use and market their engine, who then turns around and goes elsewhere thus leading to a loss of earnings.
CryTek are using one of the biggest and successful (not to mention expensive) litigators in the US for this case. These are the people who won a high-profile $500m settlement from Oculus/Facebook recently. They're very unlikely to agree to take this case if they felt it at all frivolous, as it's likely to be high-profile in gaming media and thus could be damaging if they were to lose.
I've noticed a lot of sentiment around that this is CryTek being petty, or looking for a cash grab. If it's the case and CIG haven't done anything wrong, nothing is lost -- in fact, it would look good for CIG to come out of it unscathed. If, though, it's settled out of court or the court finds against CIG, the backers *really* need to start asking serious questions about the competence of CIG's management. If CIG lose it's on them, not CryTek.