When you license an incomplete engine, you get incomplete code... That shouldn't shock anyone. Doesn't matter who you're licensing from.
SK may have some merit in elements of the case, but I think once they started demanding that they receive the entirety of Epic's Gears of War profits in damages plus the ability to keep their version of the engine and all their modifications to it as their own property with no licensing costs, I think they crossed the line into ridiculousville.
We'll see what happens I guess.