he took an off-the-shelf alarm clock, and made it look like a bomb. He did this very deliberately.
Reasonable doubt regarding motivations aside, there were a number of issues with the device being a bomb. Yes, it looked like a bomb if the only bomb you've ever seen has been from a Tom Cruise / Bruce Willis / Liam Neeson movie...but that that point, you're not qualified to determine what is and isn't a bomb. There was nothing even resembling an explosive charge in the case, and even Achmed the Dead Terrorist knows that you don't build a bomb that is required to be plugged into an electrical outlet in order to work, as you'd be rather defeated by way of unplugging the bomb.
Should the school have ignored, what could have been a bomb, because the kid was a Muslim?
No. You follow actual procedure, like "evacuating the building" and "calling a bomb diffusion team", and you treat it like it's actually got an explosive charge, none of which was done. Sure, hold the kid in the principles office (or some approximation thereof as a result of the evacuation procedure), and when the bomb squad tells you that it's absolutely not a bomb, you hand the device back to the student and say, "even though it's not a bomb, I don't want to see this in school again". THAT is how you deal with this situation - treat the device like a bomb, and then when you find out that it isn't a bomb, you treat the student like he's not in possession of a bomb. Not that hard.
What sort of litigation would there have been if it was a bomb, and the school did nothing?
Oh plenty...but the reason why they'd be lawsuited to hell and back in that case would be because they didn't follow the procedures they were supposed to follow when dealing with a bomb scare.
Now, all of that being said, even RIAA/MPAA math would have trouble coming up with $15 million in damages from the situation. A mess was made by all parties involved, these things happen, apologies were made, and I wouldn't be patently against filing a four figure lawsuit + court fees, just on principle. Lawsuits like this though are why we can't have nice things.