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I thought there was something in there stating that they were allowed to monitor your connection to see if you're using the program for things you aren't supposed to be while the WoW client is running. However, the penalties are, of course, simply suspension of your account.
Really, on the whole, yeah. This ain't legal. There's no way the server software was built 'from scratch' without some obvious reverse-engineering. However, actually bothering to have one of these shut down would be much more pain than it's really worth, especially when they can't do anywhere near the full game wortha content. So it's illegal, but nobody really cares.
See: The umpty-billion private Ragnarok Online private servers that still exist.
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