The iPod (and iTunes) would play unprotected mp3 files just fine. You could rip a CD to mp3's or download mp3's from Limewire or Napster and pull them into iTunes and the iPod without any problem. It just wouldn't play DRM-laden files that were not Apple FairPlay. Apple had no reason to support third-party DRM on their system.
Yeah this is probably the most absurd thing I have ever heard.
That's like me making a computer that only runs my proprietary 'cool play' apps (Apple DRM), and all normal windows, OS X and, Linux apps. Then someone suing me for not being able to play emulated Wii U games on my new computer.