You have to go back up first after your character mentions "this looks familiar", talk to the pirate captain, and after this conversation you can go down again and the fight starts normally.
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Thank you so much for pointing this out. After trying 20 times and failing to fix the issue, saw your comment and was able to progress.
Ethel is definitely broken doing it this route, just frozen in combat, but at least was able to continue on. Bummer to have missed out on that battle, but at least I'm not stuck.
