Id have to side with blizzard on this one (I'm a fanboy to neither company, but if i was to either it would be Valve as the only game ive played made by either company is Counter-Strike).
There should be no issues with Valve making the game they're making, but they definitely should NOT be allowed to actually call it DOTA. DOTA has evolved to be pretty much a genre now, and if they want to make a game in that genre they should have to rename it to something like Heroes of Newerth, League of Legends, etc like other companies have. Having _one_ of the developers, who wasnt even the original one, working with you shouldnt give you the right to the name. (For the record, Icefrog worked for Heroes of Newerth in the past, and another original DOTA developer works on League of Legends).
I'm not really sure that blizzard would deserve the right to copyright the term DOTA either, but if ANYONE does it definitely is NOT Valve. Blizzard is right in saying that it belongs with the community, as it rightfully should.
Secondly, even though all we've seen so far is some artwork for Valve's DOTA 2 - the models appear to be BLATENT rip-offs of that of Warcraft III's, and if they are all like that included in the final game then they definitely shouldnt be allowed to do that either.
If Valve were to make the same game they're making, assuming that none of the models/artwork/etc are blatent copies, and to rename it something other than DOTA, then i would see nothing wrong with what they're doing. If they continue to use the DOTA name though id definitely have to side with Blizzard on this one!