Does the company have any jurisdiction over what appears to be Nick's own project? This really sounds ridiculous.
Work performed by an employee during the course of operations is considered 'work for hire', and is the intellectual property of the employer. If he then goes on to replicate a large quantity of that work 'on his own time', he is most likely infringing on that work that he previously did (unless he's very careful about it. Since he didn't seem aware that it was a potential issue, he probably was not).
Now, it's not obvious that the employer would have won such a suit, but it's not a frivolous and un-winnable case either. It's generally best to talk to your employer about this sort of thing before releasing it - if they had been real jerks, they could have sued him for infringement despite his taking it back down when they asked.