Fact is, they have good reasons to. Lemmy likely was threatened by a larger industry that could've thrown millions of dollars around in a court to get Lemmy taken down. The guys running Lemmy wouldn't have enough money to win a lawsuit, the website could easily be taken down by a larger entity. When it comes to losing the community or blocking a couple communities, it's an easy choice. In summary, they're just trying to save the website by avoiding future lawsuits, and these communities still exist but can't be accessed on Lemmy itself.
I guess the problem from an idealistic standpoint is fine, let them sue. Hosting an instance is not about being profitable. Do what you need to do as far as shell corporation and all that to protect your personal finances, or just close the instance instead of censoring. The community is just people who will find another instance, it's not empowering to treat people like they will fall apart if you don't submit to hegemony.
Now, it's just an instance that is perpetuating unfair systems of power, instance of helping to democratize the internet.