Unfortunately, by that logic you could conclude that competing with Microsoft at all would be out of question because in theory they could sue you into oblivion

Unfortunately, by that logic you could conclude that competing with Microsoft at all would be out of question because in theory they could sue you into oblivion with a completely arbitrary lawsuit. The real world isn't quite that bad, so OP is correct to observe that Microsoft does not in fact have a trademark on Copilot, they have a pending trademark on Microsoft Copilot and GitHub Copilot. Given that their own trademarks (owned by different subsidiaries) include a second word to qualify them and would pose a substantial risk of confusion with each other if Copilot alone were treated as the mark, I think it's reasonable to argue that Microsoft couldn't claim a trademark on Copilot, unqualified, and is unlikely to even try to assert it.