Pardon me if this has been posted before, but I didn't see anything about it and it seemed like a pretty interesting concept: I think it's a pretty clever way to introduce the character and the presence of so many other well-known DC villains should provide a draw even for people not interested in the Green Arrow himself.
The movie concept has been discussed on the BBS some time ago but now for a while. Some people argued in favour of a traditional origin story for GA, while more seemed to like this idea. I was initially in the former camp, but have come round to the latter. A sort of superhero Prison Break, I suppose. And let's face it, Goyer has a pretty good track record in the comic adaptation field. Glossing over Nick Fury, that is! One thing I didn't see mentioned in that article but that I have seen elsewhere is thatout of respect for Heath Ledger, the Joker won't be seen in the prison. We will see his name on a cell, but that's it. If the recent story about the Superman series being in a sort of limbo is correct, then I don't think there'll be a problem with them using Lex Luthor in this movie. However, I'd be surprised if they were allowed to use Edward Nygma/ The Riddler, in case that treads on the toes of a third Nolan Batmovie.
This actually sounds like a really cool concept - and I generally hate super-powered movies, with lots of villains or heroes (a la "Justice League"). I think Warner Bros. is realizing that it's most succesful comic book movie franchise (Batman) works so well because it's so realistic. And this movie sounds like a much more realistic, gritty take on the "Super Teamup" concept than the "Justice League." I don't think it's just out of respect for Ledger - story-wise, I don't see ANYONE (supehero or otherwise) teaming up with the Joker, unless they absolutely had to. He's generally regarded as the most evil, most scary man in the DC universe (by the other inhabitants of said universe). There's probably a scene where someone mentions asking the Joker to help out, and everyone says "No Way!" But I wouldn't be surprised if you hear a laugh in the distance, or from the dark, meant to be from the Joker, as a haunting reminder... Yeah, there are some interesting implications with regards to "Batman 3" if they want to include the Riddler in either of these movies. My guess is that they'll wait until Nolan decides which villain(s) he wants to use - if it's the Riddler, they'll use a different villain for "Supermax." If not, they'll use Ed Nigma.
Personally I wouldn't worry about trying to line it up with Nolan's Batman at all. Nolan's doesn't have meta-humans (as far as we know) or super-powered aliens. I'd just establish a new continuity for this film (and perhaps Justice League in the future) separate from the more "realistic" world of Begins and Dark Knight.