I think the right way to handle that crisis would be to support them in their decision, but make sure they aren't directly competing with Fog Creek. Maintain contact, and make a gentleman's agreement that they won't poach people from Fog Creek. Keeping things friendly would be far more beneficial in the long run.

A lot depends on how many people would be leaving, too. If it's 2 or 3 people, it's not a huge deal, but if it's half the company, and if they are going to be making bug-tracking software, I think they might have to try to take a harder line.