I can kind of see Microsoft's point about how the two names can be confused.
Aha! I'm not talking about confused on paper, as in confusing "Lindows" with "Windows", but I am talking about getting it confused when spoken.
When talking to friends and family members casually about this new product called "Lindows", most people looked at me as if I was crazy and said "But Windows has been around for a long time." I then had to explain that I said "Lindows" and not "Windows". The second people hear something that sounds remotely like "Windows", they think of "Windows" simply because it is human nature to approximate sounds and categorize them as words we are familiar with, rather than interpreting them strictly phoenetically.
So, in all honesty, I'd have to say that they chose a name that could cause quite some confusion.
In my opinion, the name "Lindows" looks and sounds dumb anyway, but that's a different argument.