The thing is Scrapyard Dog is probably still trademarked by someone else too; Creative Software Designs may have been bought by Atari sometime, and thus now belong to Infogrames/Atari. Or someone else bought the rights... maybe the devs still have it.
I really can't say how to proceed for sure; it's up to LX.NET to decide.
But in general you are correct, changing the characters and story to something else will be the safest way to go. It's just a bit disappointing because we tried to do a 1:1 port, that's why the graphics look so undetailed. That will not happen now.
Systems owned: Atari 2600, Lynx, Jaguar, NES, SNES, N64, GameBoy, Master System, Mega Drive, Dreamcast, Game Gear, PlayStation, PlayStation 2, PlayStation 3, PlayStation Portable, Xbox, Wonderswan