He is completely wrong. If he wants to produce a derivative work he needs the copyright holders permission. There are no pixel counts, percentages, or any other tangible factor that can thwart copyright, be it of images, music, text or anything.
C&D is the first step; if it doesn't do anything then take him to court.
I know it's the kind of situation that is probably making your blood boil (especially if you cannot afford to take legal action), in which case all I can suggest is that you feel proud that somebody has been inspired by your work; try to forget about it, and move on.
You could however drop one of the journalists at The Register an email - they like outing companies that have selfishly ripped off other websites.