>When you license lyrics, you don't necessarily get the actual written words to use (the lyrics).

Yep

>You simply get permission to use the lyrics.

Also yep.

>Genius volunteers listen to music and write down their interpretation (punctuation, spelling, spacing etc.)

This does not give the volunteers or Genius ownership of the transcribed lyrics.

>Genius has a TOS to prevent republication of their content.

The recent LinkedIn lawsuit seems to set precedent that you cannot enforce a TOS on publicly accessible content like this.

>Genius started the lawsuit because they claim Google violates this TOS by duplicating Genius's unique transcriptions.

Sure. Doesn't mean they have any chance of winning it.

>Google specifically claims they are NOT scraping Genius, but Genius claims they have proven that they do with watermarks.

My understanding is Google is claiming they get their lyrics from a 3rd party. If that's the case, they can certainly say that they aren't scraping Genius themselves.