This is the type of reactionary /. story that I love. Somebody posts about a one-sided post about some possibly egregious policy of some company.
What we don't have is comment from the other side, either in the form of email or direct comment from the company in question. The XBox Live contract forbids the use of offensive terms. Are terms like lesbian and gay themselves offensive? No, but there is no way to have apply a policy automatically and have it understand context, so sexxylesbian69 would be singled as would WellAdjustedLesbian8. I'd like to see a response from Microsoft on the actual policy.
Do they automatically suspend accounts with "offending" tags and then reinstate them when the user can clarify the use? I don't know, the article doesn't tell me. In this example, there is likely some bad customer service, the CSR might not understand the policy and might just be quoting the only thing they know. Those who believe they have been wronged ought to push to have the call escalated to a supervisor who might be able to fully explain the policy and actually help.
It would be nice if the linked article were actually a piece of "journalism rather than another opportunity to prove how bad Microsoft is, even though we still by their products.