The crux of the matter seems to be that Youssef, the director, did not make Garcia sign any form of written contract before filming her scenes.
A standard work for hire contract would have relinquished Garcia's copyright claims to the work and none of this mess would have happened which is exactly why every professional organization insists on contracts being signed.
Absent a contract, the court is forced to determine what the implied contract is. Now, if Youssef had hired Garcia to work on "Innocence of Muslims", the court may have determined that for a 5 second appearance, a work for hire was implied and Garcia's copyright claim does not outweigh Youssef's.
But that's not what happened, Youssef hired Garcia to work on "Desert Warrior", a film that was described as materially different from "Innocence of Muslims". Given that, it becomes tricky to determine whether the implied contract was broad and general or towards a specific piece of work. The lower court interpreted it as general, the appeal disagreed. I can see both sides of the argument but, given that no contract was signed, it seems correct to me to give the maximum latitude towards Garcia.
The court decision though, is that only the 5 seconds that Garcia appeared on film could be copyrighted by her. Youssef is still perfectly free to produce a cut in which her 5 seconds is excised or replaced and re-upload it to Youtube and Garcia would have no more claim to attempt a takedown.
So, in summary, this case only creates a precedent if:
* No work for hire contract is signed
* You materially misrepresent or misappropriate the nature of work to be performed
* The person later files a copyright claim
* The work can't easily be altered to excise the copyrighted parts.
Again, I'm not a lawyer so I may be reading and interpreting the case wrong but it seems largely reasonable.