The idea that keeps getting spouted that IP holders MUST defend their rights is not only ridiculous in the details, it makes zero sense in practice. How do people think ownership works? Like would I suddenly free Mario for the masses if I just sit on my copyright infringing work just long enough to trigger the PUBLIC DOMAIN FREEDOM GONG? Is Nintendo going to lose rights to sell and market Zelda if I parade my Midna T-shirt business in front of their headquarters enough days?
No. Obviously not.
Nintendo can choose to enforce what it wants to. That is its right as the IP holder. It is ENTITLED to do so. It is theoretically possible to lose a trademark (not the actual IP rights, mind you) if you show that you completely do not care about utilizing the property and you are basically just squatting on it so other people can't. That's not only a hard bar to prove, it's also not something that happens after one project. In fact, I bet (and this is speculation, since I have not tried to find case law for this) if Nintendo were to notice the fan project and give their approval to it, I fully expect that they would even be able to consider THAT protecting their license. They vetted and approved a project using the license that they control. Done. Wins all around.
That's not what happened, and it is unfortunate (especially for this case, where there's no benefit to preventing this). I think the worst part in this situation is that even if the dude had asked Nintendo for permission, they would never have approved the project. So, for someone passionate about this project, this is really the only realistic path that could have been taken that resulted in this seeing the light of day at all. Silly.