They should be scared. What they're doing is illegal in 168 countries. They're not complying with the letter or the spirit of laws like the DMCA that would limit their liability.
I don't think your quote really applies in this case. Megaupload is being prosecuted for plain old copyright infringement, under the Copyright Act of 1976, nothing new. If you want it to be legal for a site's owners to upload DVD rips and pay other users to share them, then that's the law you need to attack.