Whoa! I didn't realize that virtual hosting providers fall under 512(c). I figured they'd apply 512(a) (conduit provider).

Anyone have any citations for case law where virtualized hosting falls under 512(c), and doesn't qualify for safe harbor under 512(a)?

I haven't seen any case law, but just looking at the text it certainly looks like VPS hosting can't be 512(a) in normal cases without an incredibly distorted reading -- the VPS hosts systems don't do "intermediate or transitory storage" of client data, they do relatively permanent hosting at the direction of the client, exactly the kind of relationship addressed in 512(c).

512(a) would apply to, say, an ISP that stood between a system hosting allegedly infringing content and those accessing it, not to the owner of the physical system hosting that content who allowed a third party to control a VM on the physical system on which the content was hosted.

http://www.law.cornell.edu/uscode/text/17/512

No case law, just Chilling Effects: https://www.chillingeffects.org/dmca512/faq.cgi#QID127

I have personally never been a customer of Digital Ocean, in large part because, having heard these stories, would prefer that DO at least mention the matter to me before terminating service or locking my account.

Knowing first hand that other providers handle the exact same scenario with ample amounts of equitability informs my decision that there's a better way to go about it.

Effectively, it's the kind of policy that would allow me to jokingly refer competitors to becoming DO customers.