Earlier quoted context omitted.
I'd be fine with the nuclear compromise: if AI training is allowed to infringe copyright, then there is no legal protection for the models themselves and their weights. Distillation should be explicitly legal. There will of course be a huge cat and mouse game about it, but let's have competition drive prices down on the stolen IP.
Distillation isn't illegal. But LLM vendors are free to block attempts at distillation or prohibit it in customer contracts.
They probably meant that there should be a (positive) right to distill; that it be illegal for companies ban it.