Obviously I have no idea how the law should really be interpreted - or how it will be - but from a layman's perspective it seems like a settlement is still inevitable, because neither side is wrong. The puppet designers clearly created the original IP and, if their filing is accepted, their right to take back the copyright they willingly signed away seems pretty cut and dry. At the same time, the Phillies added their own value in a way that goes far beyond the original IP (though I'd argue Raymond, rather than Giles//the Phillies, is the one who contributed most of that creativity, if not the branding power).
And the puppeteers are definitely right that the Phillies' modifications are a transparent ploy, and likely meaningless.
Bring back Phil and Phillis!