It looks like something occured that caused the game to somehow think that Diddy canceled the grab at the exact moment Pikachu grabbed him.
I know that is worded poorly, so I'll try to explain it in a way that makes sense. In the game, if you land a strike on your opponent at the exact moment they grab you, you will cancel the grab, but you will still take 3% damage and will flinch. Even though Pikachu didn't take any damage and was even in the middle of a throw when the grab was cancelled, Diddy still took 3% damage and even looked like he flinched in the same way that he would if he had successful cancelled the grab with a strike.
Maybe I'm completely wrong, but I would have to say it was just a glitch that just happened to occur. If somebody knows more about what happened, feel free to correct me.