I want to side with whatfreewords here, but as a matter of law* I think the takedown was legitimate. Even though they reimplemented the algorithm, they include the what3words word list which what3words can (rightfully, IMHO) argue is their protected intellectual property.
Many legal frameworks have an interoperability clause which would allow using that list for the sole purpose of interop.
What W3W seems to be doing is taking down the sites on trademark grounds (that is, "what three words" and "what free words" being too similar).
They might have a case there, and whatfreewords might be better off distancing themselves a bit in naming. Call it "Simple Locator", state somewhere on the website (not the headline) that it's a scheme "compatible to what3words (which is a trademark by ...)" and they lose that angle of attack.
When it comes to trademark, companies are compelled to act. Failing to defend your trademark will make you incapable of defending it in the future. The DMCA can NOT be used for trademark disputes, however. The DMCA exclusively deals with copyright.
Normally, the "interoperability" defense is used to protect instances of circumventing copyright protection mechanisms, not for copying itself. For instance, that was the defense in the case where Lexmark brought a DMCA claim against a third party ink cartridge manufacturer, claiming that by making their ink work, they circumvented protection mechanisms Lexmark claimed existed to protect their copyrighted firmware code in their ink carts. The court didn't buy it, Lexmark lost, it was established that you can do that kind of circumvention. But this copying of the word list... it's different in a couple fundamental ways, and I don't know if there has been a case that has dealt with this sort of thing.
Given that they also sent a claim regarding a map feature on the .com site that wasn't provided by that site, I'm not sure if any of the claims they throw at ISPs (DMCA or not) are even legit.
The main issue is that the "free" team can't counter-claim without losing anonymity, so as far as bogus DMCA claims go, they're quite powerless.
That's why I went for the WIPO dispute, which is based on their trademark and IMHO has the most leg to stand on, instead of relying on the unwillingness of the counterparty (whatfreewords) to defend themselves.
In US law, you aren't supposed to be able to trademark or copyright things that are functional to the product, which I'd strongly contend applies to their word list and their algorithm, though who knows how it would play out if some interested party were to try pushing back.
That's what patents are for, but then they'd have to disclose it.
*IANAL