Michael Medved wrote an apologetic column regarding this incident, which I can't find a link to at the moment. It seems he knows the rabbi in question.
As a Jew, I was dismayed to hear about such poor judgement, and quite surprised to hear it involved the Lubavitch organization. Orthodox rabbis in general and the Lubavitch movement in particular have a history and reputation for tending to their flocks and avoiding controversy.
I'd say the incident is illustrative of a number of things, among them:
1) The litigious nature of American society.
2) The freedom of expression that is part of the American ethic, and that this freedom can be taken to extremes.
3) The freedom enjoyed by Jews and other minority groups in America, that can sometimes be taken for granted and even abused.
For those American Jews that are strongly attached to their Jewish identity, I suggest you to consider living in Israel, from where I'm writing this. Such a move is not for everyone, but you know who you are. We can always use good men and women in business and finance, as technicians, in the health services industries, as educators, as parents. The Hanuka lamps seem to burn brighter here.
Happy holidays to all.
Great post. Happy Hanuka over there, musician!