You may be thinking of when Blizzard used this argument for going after Bot creators in World of Warcraft: https://arstechnica.com/gaming/2008/05/blizzard-attempt-to-k...

> No, it covers any reproduction in a tangible medium, whether or not you distribute.

What's the justification of this? How does this afford protection to the copyright owner if you don't distribute? Is it purely to protect against derivative works bypassing copyright?

Copyright is more or less what it says in the name - the right to legally control the making of copies. The ability to divide making a copy from distributing it is, to my understanding, mostly not relevant to copyright law. Distributing requires making copies, and copying involves distribution of sorts.

Ugh, it seems broken and not actually protecting rights, but rather forcing terms of service to apply in lawsuits.

I mean, we're talking about a system that was originally designed to apply to literal books printed with literal printing presses. It's going to be messy at best in this age.