A) By corrupting your saves for use on other consoles they are technically damaging your property.
Banning a console from life for violating the tos would be viewed by many in the legal community as blocking the owner of the console from the service and would require a refund as returning access to the service technically costs $200 and that valuation exceeds the value of the service cost.
C) The install feature is included in all new units and is therefore retroactive on all old units. I.e. it is a feature that one paid for in the purchase of the 360 (free updates) and therefore microsoft can not technically deprive you of this garnered functionality (once given)without violating the consumer protection act as well as possibly a number of other laws.
D) Microsoft has crossed the line as much as those who have modded their boxes and two wrongs don't make a right in court.
E) proving you used your modded xbox360 for copyright infringement is a very difficult and costly proposition as they would have to literally catch you with physical copies of the game. Searching hard drives, houses, etc for said evidence would be time consuming and cost exhorbitant amounts of money, as well as violate privacy laws. Microsoft may have a lot of money but they don't have enough to sustain this type of action. As for records of playing possible burned games. It would be a battle of the experts and without physical evidence would end up being all uphill for microsoft.
F) As much as people are like "you took the risk modding your box quit whining", I'd like to remind them that no matter what no one is above the law, not even Microsoft, so banning people people is completely legal but changing the functionality of the modded 360 in regards to the hard drive is essentially damaging the product. And for those who keep going the hard drive isn't damaged, you are correct it is physical nand in the 360 that has been damaged, and the corrupted saves and profiles are damaged which is a biproduct of what for all intents and purpose was an illegal middle finger from microsoft. Yes I say illegal because it is.