We've seen things like this pop up periodically in the iPhone world. So far, each of the cases like this -- the ones that are obviously bone-headedly stupid! -- have been resolved when someone higher up at Apple over-rules the less-than-sensible person who produced the original rejection.
For example, the NIN fan application was rejected over the lyrics of one of the songs that was accessible through it (but not included in it). After a few days and a bunch of news stories, someone inside Apple overruled the original rejection.
I predict much the same outcome this time, too. Of course, first Apple will look like idiots, and will be excoriated by all the folks who love to do so. Then someone sensible will fix the problem, but that will be given far less play in the press (and blogs!) than the original problem was. This latter is not unique to Apple, by the way; it's the normal pattern of public attention to any such issue.
Of course Apple would do better to avoid such missteps in the first place...