Gaming blog Kotaku reports that Apple are "looking into what happened", and also hosts a quote from iCoder saying that they "have every legal right to market and sell the software".
The game's code was released under the GPL last May while developers focussed on their new game, Overgrowth; however, for-profit distribution of the game's assets was not authorized. The legality of GPL-licensed code for such apps is also in doubt.
Update (12 Feb): Lugaru HD is now the only version available on the Apple App Store. Wolfire are giving out valid serials to all iCoder purchasers.
You know those games where you wander through a landscape, killing all the enemies — the famous beat-them-up? Now imagine a game like that, but with rabbits. Well, add rabbit fighters and you have Overgrowth, the game that developers Wolfire Games have been working on for the last two years.