Actually, you can.
So this means that anyone can do anything to your hardware via software, and as long as they don't charge you for it, they are not responsible for loss of functionality.
By that same reasoning, no one can sue anybody that makes a virus or Trojan house, because
A. They didn't charge you for it, and
B. You chose to download it, even though you may have done so unwittingly, or had been enticed to by the claimed benefits.
Nonsense, actually. Making and distributing a virus or trojan horse breaks all sorts of laws.
The legal system worked exactly like it should. The judge viewed the evidence and dismissed the case. The lawyer bringing the lawsuit likely took the case on contingency. He likely put a lot of time into the matter, and now will not be compensated. The plaintiff will have to pay the cost (e.g. filing fees, etc.).
Assuming Apple didn't address the matter, the only part I see about the case being frivolous is the amount of damages the person was seeking. You could buy two new iPhones and four years of service for that. Ridiculous.
If performance really was an issue and Apple offered the upgrade, Apple should either 1) resolve the issues, or 2) offer a way to downgrade.
Apple DID resolve the issues with 4.1. So by your own admission, the case should never have been brought.
Why? It was an optional upgrade and many people found it useful. And with the 4.1 upgrade, performance was easily acceptable. Even the 4.0 version wasn't that bad - I had a 3G at the time.
Apple messed up by releasing the 4.0 version for the iPhone 3G, but they fixed it quickly enough.