Microsoft did have to defend it when they learned about it. No choice, or else they could stand to lose their next real case very fast.
Of course they didn't have to decide to sue rather than give the kid $1000. But I can understand a lawyer being afraid of being seen to produce a precedent. Particularly with all of the variations that people could come up with (eg "m1crosoft", "micr0soft", "micro5oft", "micros0ft", various combinations expanding out).
Cheers,
Ben