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How do Midnight Works get away with this?
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There isn't. Unless they violate an actual law, they can do what they want. There have been clones of copywritten work since copyright first existed.
Sony got The Last Hope taken off the Nintendo eShop because it was a rip-off of The Last of Us.
If companies don't want their games being copied, they can stop it happening.
Yes, if they pressure other companies to do their bidding. But nintendo didn't have to do that and nothing the studio did was at any point against any law or breaking any trademark or copyright. This was just one massive company choosing to help another massive company.