The only thing this guy was doing was making it so customers don't have to download the iso on a USB or CD themselves, and recycling e-waste in the process.
The restore discs usually don't prompt for a key. It's either stored on a recovery partition on your disk, in the bios, or hardcoded in the disc media.
It doesn't say how his disc worked but at a minimum he was still acting as an unlicensed distributor. Microsoft grants end users the right to download and create media. It requires distributors to be licensed.
Federal prosecutors initially tried to nail him with $299 per disc but Microsoft intervened and said they sold refurbishers a $25 license and at most his disc should be valued at $20.
I think he should have been notified that his actions were potentially illegal and been given the option to just destroy the media.
So the fake logos increased the value of the discs from $0.25 to $20 or $25? If he had labeled them "Eric's Restore Discs" he'd have been totally in the clear?
It would be curious to find out. I've not read anything to indicate that Microsoft would have opposed that so an official statement from them would be nice.
The fact that Microsoft sells refurbishers licenses for $25 for "unlicensed hardware" seems to acknowledge that refurbished computers can retain their license.
That being said, I would be surprised if Microsoft allowed distribution of recovery media from an unlicensed sources regardless of the label.