No, they were not planning that. This is only about 3rd level domain as the paragraph you quoted says. Every other TLD don't sell those (afaik). Normally "someone.name" would be a domain, and they would own all the subdomains. .name allowed you to register "one.someone.name" and "two.someone.name" as completely separated domains with completely separated owners. I understand why they should grandfather in existing domains but this was just madness.

Ah, fair enough. I kind of thought that third level domain registration was the whole point of the .name TLD, so I was interpreting it as shutting it down.

Good question. Yeah no idea - the email linked in OP says they're going to send a new proposal, I'm assuming it will cover how they're planning to handle it. And I guess that yes blocking second level domains that have a third level already registered is the pragmatic choice.

> I kind of thought that third level domain registration was the whole point of the .name TLD

It was initially! But there was enough demand for second-level registrations that they opened that up too (and set the stage for this whole mess).

> So the weird part then comes in: are all second level domains that have third level registrations now reserved? Do they stop being reserved if the last third level registration expires without being renewed?

Yes, second level domains that overlap with a registered third level domain have never been available. Under the original proposal, once all the third level domains were dropped, the overlapping second level domains would have been available (first come, first served). I believe current practice is the second level domain becomes available if all of the third level domains expire. Registrants in other threads indicated that there's no process to have an orderly transition from being the only the registrant of a third level domain under a specific second level name to registering that second level domain ... you would have to let your current name expire and hope to catch the second level name.