A "duplicate" of someone else's creative work is copyright infringement. If both the duplicate and the original are copies of a third party, then everyone other than the original artist/owner is committing copyright infringement (though, possibly in different amounts -- but, it's infringement, nevertheless).
However, if your customer owns the copyright, by virtue of the contract between the customer and the original artist, then your work is not infringement. In order to determine if your customer owns the copyright, look in the contract for the terms, "work made for hire." If the contract is a work made for hire, then the customer owns the copyright -- otherwise not. And, if the customer doesn't own the copyright, then you can be sued for copyright infringement.
That said, copyright infringement can only be sued on in U.S. District Court. There are very few lawyers who are competent to bring this type of lawsuit, and they are very expensive to hire. Consequently, the threat from the law firm you have received may be quite hollow. Moreover, unless and until the copyright owner registers the copyright with the U.S. Copyright Office, no lawsuit can be filed, and any infringement occurring prior to registration is limited to actual damages -- which makes the case much more difficult to win.
The issue here is largely on the customer. If you think that the customer has deep enough pockets to indemnify you if you're sued, then maybe you want to get an indemnity agreement from the customer, and you can continue to infringe, hoping that the competitor won't sue. Without that, however, you are "hanging out to dry." You could get sued, and if you are sued, you'll probably spend $25,000 trying to settle the case, because as previously mentioned, the cost of a copyright litigation defense is very expensive. You could easily spend $500 per hour in attorney's fees.
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