I won't defend that - they were certainly overzealous and careless in their handling of that domain. However, it appeared to be accidental, and in three days the websites were restored. Presumably the website owners have some legal case for any lost revenue.
This happens off-line, as well. Police make mistakes, innocents are harmed. Police are sometimes punished, and the state ends up paying out if the victim can engage in litigation. It's unfortunate, and often the side-effect of having a police force that is often given far too much leeway by a public that is too often too anxious about security.
To make any comparison between this and governments like Egypt, however, is dishonest. In Egypt, the intent, quite plainly, was censorship of political thought and speech. The freedns investigation was censorship of images the majority of Westerners agree should be illegal to produce and distribute that overstepped its bounds via either simple administrative error or a (bad) policy of "better safe than sorry." It was corrected fairly quickly.
I also question the numbers - sure, 84,000 sounds like a lot, but computers can make 84,000 different versions of the same thing in milliseconds. I've had some freedns domains in the past that I haven't used in years; I wouldn't know if there was this sort of disruption. Ultimately it sounds like a few businesses were temporarily disrupted as a result of a large police action. That's always happened in the physical world - which is unfortunate - and the Internet is not immune.