I thought I'd toss my 2cents in on this.
To the OP:
Firstly, copyright specifically, as far as art and creative materials only covers the right to reproduce (or copy and distribute publicly) something which has already been set down in a specific form. They KEY here is that you have to have set down in a concrete form. This means it has to be written, drawn/painted/rendered, or recorded. This does not extend to CONCEPTS. So IDEAS don't count. A "shadow demon" is a vague concept. You can't copyright it.
From the US copyright office:
Copyright does not protect ideas, concepts, systems, or methods of doing something. You may express your ideas in writing or drawings and claim copyright in your description, but be aware that copyright will not protect the idea itself as revealed in your written or artistic work.
So the IDEA does not entitle him to any rights. However, on the flipside, Nymph, YOU created an artwork of a skin. That act of setting your idea into a fixed, tangible form, makes YOUR version actually protected by copyright. Unless this guy has artwork that he made that shows a definate match between your skin and his artwork, that could be used to proove that you copied his artwork of a shadowdemon to make your skin, then he's quite honestly got nothing to stand on.
You also cannot copyright a name. Another section from the copyright website:
Copyright does not protect names, titles, slogans, or short phrases. In some cases, these things may be protected as trademarks. Contact the U.S. Patent & Trademark Office, 800-786-9199, for further information. However, copyright protection may be available for logo artwork that contains sufficient authorship. In some circumstances, an artistic logo may also be protected as a trademark.
Honestly, like many people who don't understand copyright and what it protects, he's barking up the wrong tree. You are completely within your rights to stand your ground to this bully. Because honestly, that's all it sounds like he's doing. He cannot own a copyright on the name or concept of shadowdemon. That's it. Period. Because that's not what copyright law covers.
I highly suggest you educate yourself more fully on what is and isn't copyrightable and don't let him intimidate yourself or your players with this sort of BS. Check out the US copyright office's FAQ, its pretty comprehensive and covers most of what's considered pretty standard in North America and most of Europe.