A federal judge just ruled that these operations are in violation of copyright and that all their redacted DVDs must be turned over for destruction. FamilyFlix has already been shut down. In this
article on the decision some practices are made clearer.
1) The businesses purchased a standard DVD for every modified one they made.
2) When they shipped it to the customer they shipped both the standard DVD and the modified DVD.
The ruling seems a little bit weird to me since it is essentially ruling that while the activity itself is legal for the DVD owner it is still illegal to pay someone else to do it for you. Interestingly the software solution I referenced above
is legal since it just alters the content between the DVD layer and the monitor without actually editing the DVD. That, to me, seems an distinction without meaning.