Koolk was arrested!!

Its similar but not strictly the same. Nexon seem to be approaching these cases by arguing lost revenue from Cash Shop items. If your private server has nothing in there that is obtained via any cash shop means (including things such as Onyx Apples) then as soon as their lawyer argues you are losing them income, you could argue back that you are providing the EXACT same service they advertise for free.

I'm not saying this is right, just curious about the implications.

Again, Libre versus Gratis.

Free of cost does not equal a free license to modify or distribute or any such thing. Yes, they provide the client gratis, but that doesn't mean you have libre to copy their service without their permission.

Cash shop is completely irrelevant in the matter anyway. When you buy things in the cash shop, you don't pay dollars for them anyway. You spend in game currency for them. Yes, there is a distinction of this ingame currency in that it can only be obtained by giving Nexon dollars, but that doesn't mean that the ingame currency has liquidity. You give Nexon dollars and they add ingame currency to your account, but this ingame currency has no monetary value. Just because you pay dollars for something doesn't mean the law is on your side if you want to change it back, PARTICULARLY when the "thing" in question is nothing but variables in a database on a company's server.

Their argument of lost income is on the same grounds that the music industry made claims of lost income. By creating an unlicensed, pirate source of competition, the "rogues", as it were, are able to detract notice away from the official product, and in doing so, are able to negatively impact the company's income. I'm not sure what methods they have for calculating the exact effect (particularly in the case of the player who got it in an unofficial server, but wouldn't have paid for it in the real one), but that aside, their stance is a valid one.

And finally note that it doesn't matter if a person is not obligated to pay Nexon to play on the official server. Again, the difference of gratis versus libre comes up. They make the game free to download, free to play. But that doesn't mean that you are free to do with it as you please. By creating a competing service, they are able to draw away POTENTIAL customers, and in doing so, they are DEFINITELY affecting Nexon's income. What you are suggesting is like trying to tell someone that Limewire doesn't contribute to the music and film industries bringing in less money. Yes, there will be individuals who would simply not download at all and are only doing it because it's free, but then there are other individuals who, if given no free, illegal alternative, WOULD spend money on it. It doesn't matter if you believe this or not, or whether Nexon can even conclusively prove that the case is true with them. The simple fact is that they do not like the unlicensed pirate server creating an unofficial source of competition, and they believe it to be hurting their income. However, even if it was not hurting their income, EVEN IF IT WAS HELPING IT, they have every right to bring legal action.

The last few patches is anything but amazing. People get banned left and right.

That's customer service problems, not patch content problems. The content made available by the patches has been good lately, and likely will continue to be good for a while to come, as Pirates, Monster book, Masteria expansion, and Magatia aren't too far away.