The devs' initial plan was to use parodies of copyrighted characters like PS1 Princess Peach and the first version of PS2 with Rogue the Bat, but due to censorship issues like how Substar just got nuked with new Terms of Services, they're moving towards original characters
Yeah, it got DMCA because Microsoft are going around and taking down games and mods that they think damages the games reputation.
For PocketSweeties 2 it would have been bad because of that they were using copyright characters from the Sonic games as a joke character for a porn game. And the Jenny update would have caught Microsoft's attention and DMCA it as well, so it was needed of them to change that so they would not be forced to shut down development.