Now onto Nintendo's legal claims: nobody can tell for sure whether Dolphin is in the right, or whether Nintendo is in the right. Like all legal matters, there is a lot of space for interpretation.
Dolphin does distribute the Wii AES-128 Common Key which is used to encrypt Wii game discs. This isn't required in theory, the tools that dump game discs could just dump decrypted images, in fact that might be easier than dumping encrypted images (the decryption is done transparently by the Wii OS).
Whether that's allowed by exception clauses for interoperability, whether that's allowed by some kind of fair use clause, whether Nintendo's broken DRM actually counts as an effective copyright protection measure, etc. -> only a lawsuit could decide that. Your guess is probably as good or as bad as anyone else's.
EOT