The reason for the suit is that the Tolkien Estate claimed that New Line shorted them on the royalties for TLOTR, a very old Hollywood practice. Usually these suits are unsuccessful, but the clearance of rights to the Hobbit was vital to New Line.
The current status of the film is that Jackson has completed the film ‘treatment’ and is working on the first draft of the shooting script. Sets, e.g. Hobbiton, are being refurbished, shooting locations are being picked out. Gandalf, Gollum, and Elrond will be performed by the same actors, other casting is not accomplished. A nasty rumor about Tom Cruise getting Bilbo has apparently been quashed. Filming will start early in 2010, midsummer in New Zealand.
Do you know where was Saul Zaentz (Tolkien Enterprises) during the lawsuit? What his involvement or non-involvement may have been?