Was Windows 1.0's lack of overlapping windows a legal or a technical matter?

The likelihood of any legal restriction was probably close to zero - it’s only from today’s era of hyper-regulation that we might even imagine something like that.

Most likely it was a deliberate technical limitation. After all, dialog windows themselves were already overlapped. I remember well what a headache it was to program and render graphical elements on those old machines (PC AT 80286 with 256 KB of RAM).

Perhaps aesthetic - both Windows 1.0 and 2.0 were (to me at least) very ugly. Things got a bit better with Windows 3.0 and 3.1 (and easier to program) but it wasn't really until Windows 95 that the whole thing came together. One thing you have to give Microsoft (at least back then) is that they did keep trying. And, speaking as a Windows developer, their documentation was very good.

As far as I've figured out the answer is that some people involved (the ex-PARC Scott McGregor and Charles Simonyi iirc) genuinely thought tiling was better, while others (Bill Gates?) disagreed but went along with it to avoid lawsuits.

“Barbarians Led by Bill Gates” is required reading on the matter.