For a prior art search, you could check out "baby blank" utility or design with a priority date before Dec 2, 1999. Look for ones that are lapsed or have priority date > 20 years old. Interestingly, the TAGGIES utility patent lapsed for non-payment in 2014. https://www.google.com/patents/US6427265
One problem is, once you find prior art, the cost to invalidate the design patent will be enormous.
It will be more cost effective to design around the patent. The design patent specifically refers to colorful LOOPS. If you make a colorful non-loop on a blanket, you should be fine. The "non-loop" could be a knot, a fringe, a tag, lace, braid etc.