My IANAL impression of the courts is also that they don't want to make a judgement based on technical distinctions, but rather looks at how the work was used and what the intentions was. Did VMware distribute vmklinux without the linux kernel, and was it written with the intention to distribute it was a collected work.

The word "arbitrary separation" also seems to cover intention rather than technical facts. Did VMware create the ESXi intention to bypass copyright, or was it create as a natural part in the development of VMware products.