I don't see the issue here as being the choice of the easiest road, but of the road with the least to lose. There is definitely a lawsuit here if he decides to continue with the product and use the code he created, leading to quite a few legal fees. If he drops it and moves on to another product he is guaranteed not to lose any more money on this project.
If he had a business, instead of "99% complete and ready to launch", you might think about offering him more optimistic advice. Diving headfirst into the drama swamps with no users up front seems like a bad business call.
Well, there's definitely a lawsuit if he uses the code and succeeds. For a Facebook level of success, well, that's just a cost of doing business. A moderate level of success will probably leave only the lawyers as winners.
