There's two issues here -- and this is a good time to mention that not only am I not a lawyer, I don't even play one on TV -- the alleged copyright infraction and the methods used by the plaintiffs to gain their evidence. Because the plaintiffs found their evidence by entering his SL home uninvited, he feels U.S. search and seizure laws should apply. However, at the time of this writing, I am not aware if Simon has filed a counter-suit.
Second Life allows content creators to place restrictions on objects they create: you can set them to be unmodifiable, non-transferrable, and non-copyable. Allegedly, Simon used an exploit to break the permissions and re-sell the items. VintFalken offers some technical insight on the matter (potential NSFW links).