Did iTunes do it or did the OS she was running do it?
Because as far as I know, unless the thumbdrive was an iPod itself, iTunes isn't capable of formatting it.
I'm guessing that you did something like create a thumbdrive using NTFS or whatever Mac OS X's file system is (HFS?) and then tried to use it on the opposite OS, which balked, and offered to reformat the drive into a filesystem it understood, which your niece just hit "OK" for.
Because iTunes may be a piece of shit (as far as I can tell, when iTunes Match released, Apple intentional broke syncing so it's no longer possible to sync music from iTunes), but I've never heard it do that. (I really should clarify that last one since you can get it to sync, but it easily breaks such that it will stop adding new music to an iPod/iPhone until you factory reset it and copy everything over again. At which point it will break again, so every time you get a new album outside of iTunes, you're in for another "factory reset and copy everything over again" loop. Which sounds like what this lawsuit is about, actually. Oh, and based on the last time this happened, it will then copy things over wrong so that metadata for songs refers to the wrong songs and some songs don't copy completely. I'm not arguing that iTunes isn't a completely broken piece of shit - it is - just that I've never seen it format thumbdrives.)