This is probably a stupid policy on the part of the Times, but they're entitled to enforce the use of their content however they want. "We disagree with their policy because they web should be open and free!" is not a valid legal defence.

If the developers of Pulse and the Times settle this (in or out of court), I'm sure Apple would be happy to start selling it again, but they run a store and can be sued for selling something that knowingly breaks the terms of use of a content provider.