While its fair to claim Microsoft has legal issues, I'm not sure what similarity you are drawing to what Cursor is doing.

It's what is motivating Microsoft to prevent what Cursor is doing.

All cursor is doing is saying this blob of crap is compatible with their fork and letting you run it. This is akin to browsers supporting extensions from other browsers, and many other scenarios.

What Microsoft is doing is trying to prevent VSCode from becoming spontaneously obsolete because coding with Cursor a) removes you from VSCode and b) does it better.