Obviously the university can't afford to punish its customers. At least, not for very long.
I'm also skeptical that 100% of students deserved to fail. Maybe they did, but that should be a consequence of individual evaluations that have a coincidental outcome, not a group evaluation that affects every individual. The older we get, the more we tend to use the shortcut of categorization instead of individualized evaluation. Categorization is efficient, and often "good enough," but honestly, students deserve the individual evaluation they paid for.
I had a high school teacher burn out in much the same way. He was actually a great teacher -- excited about the material, animated, and he always encouraged debate. He had a large number of students in one of his classes that would taunt him for childish reasons like his mannerisms, and eventually he lost it and told the entire class that they had failed, and told everyone to report to the principal's office in an expletive-laden tirade. Teachers are people, and they have limits. The behavior of the students was inexcusable, and while the reaction of the teacher was understandable, it was unprofessional and thus unacceptable.
The entire class did not fail, nor did it deserve to. It wasn't the job of the well-behaving students to moderate the behavior of the bad actors -- the other students were victims as well. I think the lesson is to really nip this sort of thing in the bud. If disruptive students had been removed after a couple of infractions, it would have both decreased the level of disruption and set an example to the rest of the class. Allowing things to get to the point described in the summary is the real failure.