> This could set a potentially dangerous legal precedent. Microsoft are arguing that the malware operation damages Microsoft's brand, instead of putting the fault onto themselves for making vulnerable software.

I don't think this sets an precedent. Think about it in terms of physical security, a thief's ability to circumvent poor or no security doesn't preclude them from liability for their crimes.

The court has seized their assets and given them to Microsoft so that Microsoft can repair the damage they've done both to Microsoft and to it's customers.