As is often the case, Google has to find a line that allows legitimate brands to do their thing, but also make sure that smaller/less legitimate sites not exploit their systems.

Google won't tell Amazon/Target/Walmart, to stop selling a product or get banned from AdWords.

But a small retailer who wants to circumvent the rules could capture PPC traffic for a similar (but legitimate) product, and then funnel people to the 'banned' product page. Rather than Google policing the landing page's CTAs & on-page intent, they find it easier to just say "you can't sell that thing."

Here's what I would do if I were Google: simply not show any PPC units (paid or product listings) on the SERPs for 'Assisted Opening Knives'. Suddenly the whole issue goes away, and Google doesn't look hypocritical - since they're then not making money off a product class that they claim to find objectionable.