I don't know enough about these games or private servers in general, but It's my understand that no legal action was taken by the companies against the private servers. It was their choice to let it slide. I don't think that there is currently any precedent in actual law where a company has filed against a private server that was open for free. Which is what I meant by grey area.
It's a common misconception that there's some sort of legal protection granted by violating copyright for non-commercial purposes; in actual fact, this is entirely untrue. The law offers no protection at all in this situation; fanfiction featuring copyrighted characters are illegal, freely distributing a pirated game is illegal (even if the game is out of print), and copying or publicly exhibiting a film without permission of the rights holder is illegal as well. This is because companies have a hard time making money selling a product if someone else is giving it away for free. IMPORTANT DISCLAIMER: This is in no way, shape or form the same thing as immoral. Please don't take this as a moral judgment on your fanfiction, because I'm cool with it.
However, most companies don't send out cease and desist orders on non-commercial copyright infringement, for two reasons. First, there's no money changing hands. If there's no money changing hands, it's not worth paying a lawyer real money to stop. (Note that this can change in a heartbeat, though. As soon as Fox licensed official "Jayne hats", hobbyists everywhere who were giving away free patterns for making your own got hit with C&D orders. Now that there was a financial incentive to get people to buy the hat instead of making it, the IP became valuable and copyright infringement was no longer tolerated.) NCSoft clearly has a basis for assuming there's value to the IP, though, so there's no reason to think they would turn a blind eye to exploitation of their IP even if it was non-commercial.
The second reason is that there's a cost to filing lawsuits against your own fanbase above and beyond paying the lawyers. If you sue anyone who writes fanfic, you're going to wind up with a fanbase that bears you considerable ill-will. Since their money pays your bills, it's worth your while to pick your battles carefully and only go after the egregious violators. In this instance, making a private server would probably be considered egregious, unless you assume like Baja that there are people making Sooper Seekrit Servers for their Sooper Speshul High School Cliques and those aren't on NCSoft's radar.
In general, never assume that you're safe from someone's lawyers just because you aren't making money. All that means is that if they do decide to go after you, you won't be able to afford a lawyer.
