Long story short (and with plenty of gaps):
Around the time Thracia 776 was finishing up, Shouzou Kaga went ahead and started forming his own independent game studio, and then left while at least attempting to take plans for a new FE game with him. At his new studio, he started work on Emblem Saga for the PS1, which was Fire Emblem in everything but name, including the apparent use of the Archanean setting. Nintendo threatened legal action, which led to enough changes that the game became TearRing Saga, but it was still pretty much FE with a different name. There was a lengthy legal battle between Nintendo and the game's publisher Enterbrain over copyright infringement that, after appeals, left Nintendo with a monetary award, but the game was still allowed on store shelves.
The whole court battle was probably what led Kaga to not copy the FE design template for the second TRS game. It played dramatically differently, with things like hexagonal map grids and other changes. But after that game was released on the PS2, his studio didn't make any more games. A few years ago, he officially retired from the industry (despite not having done any major game work since the second TRS game), but recently worked on an independent strategy RPG using RPG Maker-like SRPG Studio called Vestaria Saga.
EDIT: To summarize:
- Kaga formed a new studio while still an employee at Intelligent Systems.
- He tried to take plans and assets for a new game with him when he left.
- He made a blatant FE clone for a competing console and Nintendo's legal team got involved.