I don't know how they even thought it could be legal, since by cutting bits you are creating a derivative work, which is still covered by copyright and thus distribution is controlled by the copyright holder.
It appears that this case deals with copies of the movies that have been edited and then they are selling those DVDs. I agree that this would violate the copyright holder's prerogatives.
There is a separate question (at least I think it's separate) of a computer based DVD player that recognizes an inventory of movies that are inserted and the player skips over the "offensive bits," according to a program supplied by a third party. That, to me, would not be a violation of the copyright since you are dealing with the original work but are automating a process you could achieve manually with a remote control.
It's like playing The Wizard Of Oz on the DVD but turning down the sound and queuing up the Dark Side Of The Moon CD at the right point. It would be illegal if you pressed a new DVD with the altered soundtrack, but having the two things coordinated, even if a computer program helps synch it up, should be legal. (By the way, I've done it and it is uncanny how well it fits, whichever of the two queue points you use).
If this case is about the latter situation then I disagree with the ruling.
They need to pay royalties, but they should be allowed to scrub the films. If I buy a book and ask a person to black out profanity before I read it, that should be fine.
Copywrite does not protect from editing by the end user. Only royalties are protected.
When states had official censor boards (and Baltimore had one that DID cut films into the 1980s and England STILL cuts films although their bans seem to be lifting), did they "violate copyright"?
The copyright violation would appear to be ANYTIME you rent a DVD to someone else. Read the opening screen. How many stores get "authorization" to rent titles?
So where's your tupence in the mail for the heirs and assigns of Noah Webster you spelling thief! Stop your illegal and immoral derivative use of his work immediately!
I guess my high school AP English teacher was committing a crime then, when he showed us "Clan of the Cave Bear" and kept fast-forwarding through the sex scenes.