No, what was proved in court was that they downloaded and trained on millions of pirated books. The court said their use of books is fair use, but stealing them isn't.

I think we're going to see cases that find distillation is also fair use. You're using the competing model like a book. You pay for it, you use it (read it), it informs your model, but you aren't repeating/reselling what the model told you verbatim. Foreign labs may still run afoul of competing labs' Terms of Service, and they may also pay a settlement (or not, it's a different jurisdiction after all), but the damage is already done. Distillation will become uncontroversial when done legally.