Update: Hackaday has an excellent analysis of this suit:
https://hackaday.com/2018/05/14/the-eric-lundgren-story-when-free-isnt-free/
Not only is the labelling of the CD a problem, but it's actually a software license violation to sell a Windows restore CD at all, even at a loss. Even burning a restore CD for someone else for free could violate their license.
Also, somewhat surprisingly, it turns out that selling a Windows user license second-hand (which would be included when selling a used Windows computer) is a software license violation, and Microsoft would like to charge $25 for transferring a license in a sale to the new owner.
