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In the author's blog, she mentions that these are collections of short stories, not novels. She presumably signed a contract for a specific novel (normally outlines are involved with contract signings) and often the publisher has a right to reject said novel and first option to buy future work.
These are short story collections. One was published BEFORE the contract was signed and still the publisher demanded she pull it down before ultimately relenting. The second book is a collection of short stories, almost all of which had already been published in magazines or on websites, so all of the work had already been publicly available.
Of course, it is considered very bad form to publish with another company if you are under contract with a publisher, kind of like playing for the Yankees and coaching during summer break for a Red Sox training team.
Generally speaking, it is common practice in publishing to allow authors to write and sell short stories while they are working on a novel and I have never before heard of a publisher forbidding selling to smaller markets. In fact, publishers often encourage short fiction sales in genre work to prime the well and create author awareness before a new novel...unless, of course, you are running late on deadline in which case you had better not stop to eat, drink or sleep until the book is done.
IMO (and IANAL but I've heard some interesting discussions on the subject at cons), by the publisher insisting that she pull down the other books, they are basically stating that the $20,000 advance is an exclusive arrangement and she cannot derive income from other sources, thereby potentially making her considered an employee of the publisher...which is the absolute last thing a publisher would want because of the tax and health care implications.
(As I understand it, the IRS has ruled in the past that if the bulk of your income comes from a single contractor and you are in any way restricted from earning income from other sources, you may be ruled an employee of that corporation and not an independent contractor.)
Bottom line, she's probably much better off going indie at this point anyway and waiting to sell future print rights until she has enough clout to dictate the terms she wants (a la John Locke) rather than having to meekly accept the terms the publishing company dictates.
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