The point of contention is that the Holmes/Watson stories published before 1923 are now in the public domain, but the Doyle Estate still has control over the last ten stories published after that date (in THE CASE BOOK OF SHERLOCK HOLMES ). That means anyone who wants to can write a Holmes or Watson or Holmes-and-Watson story drawing on any of the material in the four novels and first forty-six short stories, but would have to get permission from the Doyle Estate to use any detail drawn from those final few stories. The Doyles argue that you can't divvy up a literary character this way: either he or she or it should be copyright-protected or not: all or nothing. The other side points out that copyright law doesn't work this way: it protects specific works, published on specific dates, not elements that spread as intangibles across a body of work. The judge ruled against the Doyles, who have appealed to a higher court, so it now moves up to the Circuit Court.
On the one hand, it's easy to empathize with the Doyle Estate's position: there's something bizarre in the idea of having simultaneously a public-domain version of Holmes and an Estate-controlled version of the same character. Tolkien himself said once that myth was "alive at once and in all its parts and dies before it can be dissected". Most of us now think of the Holmes series in a more general than specific way, a composite image drawn out of multiple works rather than distinctly story-by-story. For Holmes to be 5/6ths in the public domain sounds distinctly odd to most of us.
On the other hand, if you could extend copyright indefinitely by authorizing additions to a series, that'd defeat the whole point of public domain: to eventually let works be absorbed into common culture. The Doyles have been making money off Holmes for a hundred and twenty-seven years, and counting, not just through Doyle's long life (he having died in 1930) but the entire lifetime of all his children as well. How long is enough?
Then too, I think there's danger that the Doyle Estate's argument could turn against them. If the world of 221B Baker Street has to be either all-in or all-out, wholly in the public domain or entirely in the control of the Estate, couldn't you make the argument that the five/sixths in the public domain outweigh the one/sixth still in copyright?
Of course, all this has applications far beyond just Holmes and Doyle. There are plenty of great characters who are partly in and partly out of copyright, like Bertie Wooster and Jeeves (mostly in), Allan Quatermain (almost entirely out), Agatha Christie's Poirot (almost all in), and The Insidious Doctor Fu-Manchu (evenly split).
The ideal of split rights to a set of stories also has resonance in Tolkien studies. Famously, the Peter Jackson films are limited to drawing only on THE HOBBIT and THE LORD OF THE RINGS, and can't use any information from, say, Tolkien's LETTERS or UNFINISHED TALES or any of the various Silmarillion texts. It's also easy to see how works in the legendarium cd have slipped into a protected/unprotected split, like the Holmes stories, had Tolkien's copyright for THE HOBBIT and LotR, been thrown into the public domain by the negligence of his publishers -- which almost happened (the so-called Ace Books crisis), and remained unresolved from 1965 to 1993, when a judge finally definitely ruled that the copyright was secure. What kind of pickle wd we all be in if those two works were public domain, yet all the minor works published in the sixties (OFS, LBN, SWM, RGEO, ATB) and all the posthumous works so superbly edited by Christopher Tolkien were all copyright-protected and under the Tolkien Estate's control. That'd be a right mess. Luckily for us all, that's not the case.
I'm also grateful that, while Tolkien created many of his iconic characters before the 1923 deadline (Earendel, Feanor, Beren, Luthian, Turin), he did not publish any of them until much later. So Tolkien's copyrights shd be secure until at least seventy years after his death -- i.e., in 2043, still thirty years away.
Returning to the Holmes canon, here are two earlier postings by Paul, which fill in more of the detail behind the case
And here's a web-site giving regular updates on the case from the guy who filed the lawsuit (the one advocating that the Doyles have benefitted from Holmes long enough, and it's time to give the rest of us a turn):
current reading: THE HEIR APPARENT: A LIFE OF EDWARD VII, THE PLAYBOY PRINCE  by Jane Ridley