Yeah, there is a lot of confusion here.
As I recall, the basic set and AD&D were both designed to screw Arneson. TSR knew they had to pay him royalties on the rules in the basic set, as they were so closely derived from OD&D. But they reasoned that the rules were only part of the value of the set, which also included a module, dice, character sheets, and a tiny pencil (I think), so they tried to pay him only a partial royalty on each set.
And, famously, AD&D began these editions shenanigans because TSR tried to argue, in court, that AD&D was different enough to essentially be a whole new game, so Arneson was owed nothing. They lost both suits and had to work out restitution with him. I don't know what the reference to WotC paying off Arneson is about - perhaps someone can enlighten me.