Gag me with a spoon! Copyright?????
I see that Abuse has responded to the copyright part of this question so I will just address the "how did this happen" part of the question.
When setting your pictures to not be availible for download the wording says that it is only a means to discourage. By "discourage" we do mean simply "discourage". Please understand that if a photo can be viewed in a web browser, it can be saved. The transparent image overlaid on the photo will not keep your images safe from theft, and is intended only as a slight hindrance to downloading.
This is the first e-mail sent to me responding to my stolen photo's. Like who is kidding who here. Obviously there is no point in setting any permissions on Flickr because we're wasting our time!