Was Sony justified in trying to stop Bleem!? It did allow the use of illegally, copied games. I was just a first-year law student before I decided that I couldn't take it anymore, but according to the DCMA, anything that allows the circumvention of any copy protection method, on any copyrighted work, is illegal.
You ARE allowed one legal backup copy of media that you own, but you CANNOT circumvent any copy protection schemes to obtain hat copy. Nice huh? It's a really grey area and needs to be challenged, but thats the way things are for now
MOD chips are illegal because they circumvent Sony's copy protection schemes and allow you to play illegally copied games on CDR. Bleem could be seen as doing the same, but who knows.
If you ask me, I think that Sony was really worried about consumers seeing the power of the Dreamcast. You buy a dreamcast with some playstation games and you see how much better the Dreamcast handles things, so you say to yourself: "Man, the DC has such better graphics", etc so you stop buying psx games and start buying DC ones. I think that Sony felt that they would lose customers and 3rd party developers to Sega. They probably also felt that emulating the their system on a much hated competitors system was a slap in the face, or something along those lines.