If I say, “output the contents of X verbatim” and then use the output, am I free from liability?

If the generated code in TFA contained the actual Counter-Strike source code, then you (well, Valve) would have a defensible claim. But the prompt was to make something like Counter-Strike, and it came up with something different. That's fair game.

I can assure you that Valve is not remotely concerned about this AI generated "first person shooter" taking market share away from them.

Definitely citation needed. Such court cases usually come with a lot of important context. How can you just make such a statement and get away with not providing any context link?