It seems strange to me that although Microsoft is the company at fault here many of the commentators seem to be basically praising Microsoft and blaming/deriding the guys whose code was plagiarized.
Microsoft is guilty of it because they are the ones who published the code/product as their own. They hired someone to do the work. Yes, that person ripped of Plurk, but Microsoft failed to verify their contractor's work. That makes them culpable.
Plurk was ripped off by Microsoft. Full Stop.
Now, Microsoft has it's own options with respect to that contractor, but their swift response doesn't erase Microsoft's liability.
Plurk did get a ton of free PR from this. For thousands or tens of thousands of people, this will be the first time they've heard of Plurk. To claim that Plurk was somehow "damaged" amidst all of this is just stupid. Yeah, they were ripped off. But nobody got rich off of it. There is no money to chase down. Plurk could net themselves way more money (or rather, any money at all) by trying to generate new profits by taking advantage of all the free PR they got. But they're throwing a hissy fit after Microsoft has done their part in fixing the issue (pulling the plug on a product that wasn't even released yet anyway). As others here have said: what a waste.
What you're describing is a legal nightmare. In this case, imagine that Microsoft didn't pull the plug. What would happen then? Would Microsoft say "Oops, sorry, it was the contractor's fault. But we paid him, and got our code, so we're going to keep using it." They didn't pull the plug out of the goodness of their hearts. They did it because they are legally liable for it, and the longer it was in the wild, the worse their liability.
The rest of this is PR. Plurk maybe pushing this a bit far, but that is a PR decision, not a legal one. From a legal perspective, they might have been injured enough for a lawsuit.
The wise thing now for Plurk is to accept that apology gracefully and work with rather than against MS to move forward. If they don't want to be acquired, perhaps MS can devote their legal resources to helping Plurk gain access to the China market as a development partner, or lend some development resources to help Plurk package their solution into an API that MS and others can license a la Wordpress.
At present, MS is (almost certainly) spending good money on having their lawyers work out a defensive strategy against a possible lawsuit that will cost them a lot in bad press but which Plurk probably can't complete, given the implication that they don't even have funds or expertise to hire a PR company. I presume it's Plurk's Taiwanese business identity that keeps them out of the market in mainland China (since China technically views Taiwan as a rebellious province rather than a separate country, for historical reasons).
Some Taiwanese companies do conduct business in China, but Plurk is likely too small to tap the necessary diplomatic channels that facilitate such arrangements. MS could surely assist with that...if Plurk will let them. What Taiwanese diplomat will want to advocate for them if there's a chance it could lead to loss of face down the line? By maintaining their aggrieved stance, Plurk risks being given a grudging payoff to go away, whereas if they respond graciously, they might get the keys to the kingdom. The one thing more annoying than a sore loser is a sore winner.