The Free Software Foundation Europe (FSFE) has a fairly good summary of the case. The case began with AVM seeking injunctions against Cybits, to prohibit Cybits from "supplying, distributing and/or operating the 'Surf-Sitter-DSL' software, as far as this software edits and modifies the firmware," embedded in the router." The problem here is that part of the software being modified — as shipped by AVM, and modified by Cybits, is under the GPL.
According to the FSFE, AVM is trying to claim that the entire product should be regarded as copyright by AVM. It's not uncommon for distributors to claim a copyright on an aggregated work, but generally if you're shipping software that is under different licenses it's customary to note that the individual packages have their own terms. In other words, Red Hat Enterprise Linux or openSUSE may have an aggregate copyright, but that doesn't affect the individual licenses. So if I want to ship a modified version of the RHEL 6.1 kernel, I can do that regardless of the aggregate copyright.
AVM is trying to say that it can copyright the bundled product and not be subject to the terms of the GPL.
Welte, not surprisingly, has disagreed — and has stepped into the case to argue that AVM is violating the terms of the GPL and has lost the right to distribute the software that is his in the kernel and other bits.
This is not the first time that this has been put in front of the courts — AVM has already been slapped down by the Court of Appeals of Berlin when AVM sought the injunction. It's now being put in front of the District Court of Berlin tomorrow (June 21st).
I'm not a lawyer or expert on the U.S. legal system — much less Germany's legal system. However, it seems to me unlikely that the court is going to find favor with AVM. Welte has a history of success in pursuing GPL infringements in German courts, and it seems from this vantage point that giving a company the right to disregard the GPL's requirements would give other companies the right to disregard other license terms if aggregated. I can't see a court doing this, but I suppose we have to wait until the decision is reached to breathe easy.