You need to have a working knowledge of Australian Trade Practices legislation to understand the decision. The ACCC (Australian Competition and Consumer Commission) has been particularly incensed by the DVD region scheme, labelling it anti-competitive - the idea being that if a consumer is able to source something cheaper from overseas, then they should be entitled to buy it - you have to remember the population here is less than 20 million, so the potential for large overseas suppliers who control distribution is much larger than it is in the US.
As such, this ruling allows people to modify their consoles to play games from overseas - and thus by extension it is legal to supply chips to allow those modifications.
IT IS STILL ILLEGAL TO SELL, BUY OR BE IN POSSESSION OF PIRATED GAMES!! In fact, the same supplier, who Sony was attempting to prosecute for selling modchips, did get convicted of selling pirated games and copped a pretty substantial fine (like 6 figures or so).
What MS is actually crapped off about is that people can modify their X-Boxes to play US games they sourced from overseas, cheaper than they could get them here.