I say that Bethesda does have a right to sue Notch. However, to do so is sort of petty and MIGHT decrease their reputation with their followers/customers/gamers.
I could see why Zenimax would sue Notch, for the sake of confusing the games with eachother, which thus might cut into Zenimax's profits for The Elder Scrolls, but it's a very slim chance.
Think of it this way: if someone were to write a book called The Sword of Strength, and made a series out of it, a very successful one, at that, and then some other guy wrote a whole different book called Strength, and then the first guy sued him because the name of the books might get confused and might cut into his profit.
Do you follow?
In conclusion, the decision was both a smart one and a dumb one. I will definetly still play games from Bethesda Softworks and Zenimax (hehe, I've already pre-ordered Skyrim on Steam) but this was really petty of them to do.