they knew that ASIC mining would kill off scrypt coins and anyone who bought an scrypt ASIC would regret it. Legal or not is a different issue....
... I wonder if this ultimately means scrypt based stuff dies off altogether and Bitcoin becomes stronger for it ...
No it won't die off altogether.
Altcoins were developed only so that people could mine on commodity hardware and it be impossible to mine on GPUs FPGAs ASICs... oh shit, why do they exist now?
People forget why they got into a movement in the first place and then once they have embraced it they lose sight of it and fail to see when that reason has gone. History has shown time and time again that also-rans like this never die off fully with the early adopters pushing it for ever more, ever hopeful, but ultimately futile.
With tongue somewhat in cheek, this observation seems as true for bitcoin as scrypt coins at the moment.