That only applies to erroneous acting of the lab (losing, mis-processing etc. film). In this case they may have acted rightly.
But in a very large lab, its another can of worms. You have no idea who is working the floor and one is opening themselves up for scrutiny or poor decision making.
I can't sell you a hot dog without taking a course on food safety and undergoing health inspections. I have to have licenses and pay fees for all of this.
But, who trained the employees of that business in pornography detection?
How were these employees informed that they were responsible for detecting and reporting pornography? Did some government official send them a letter? Did they get a visit from the police? Did they just read about it in the newspaper? Who told them to interpret photographs in order to report them?
Who taught them the legal standards for judging photographs as pornography? Don't give me the, "I know it when I see it," argument. This is different. A man's liberty and property are at stake. It's not just a case of freedom of speech.
Which employees took a seminar in pornography detection? Are they lawyers? Are they criminal psychologists? Where are their degrees? Where are their certificates? Who paid the fees and secured the licenses? How can untrained, unlicensed and uneducated store employees be expected to know the law and act correctly? We're talking about the possibility of sending a man to jail, here!
If a store owner hired a security guard to look out for shoplifters, that person would have to be trained in civil liability, the legal standards for shoplifting as well as the proper methods of confronting potential shoplifters. I know. I have taken those courses.
If a store security guard confronted a customer who is not actually a shoplifter, he could very well be held liable for damages. He could be charged with false arrest and, himself, be thrown in jail. (If it is an egregious offense.) He and the shop owner who hired him could be held liable for (money) damages. It could easily be enough to ruin the business.
If I owned a store, I would instruct my employees to NOT confront shoplifters. I would simply tell them to follow the guy to the property line, get his description and write down the license number to his car if they can then call the police. My security cameras would have recorded the crime and would be evidence of guilt.
I don't care if this happened in Adelaide or Albuquerque. If I owned a photo lab, I would instruct my employees to NOT report any photographs to the police unless it was absolutely, crystal clear that something illegal was taking place in the pictures.
I don't think the business owner was right, in any sense of the word, to do what he did.
I make it a point to shop at my local camera shop whenever I can. Maybe I don't spend $1,000 every week but I am a regular customer. If I just need batteries for my TV remote control, I'll stop there if it's convenient. I'm pretty sure I spend $1,000 over the course of a year. I don't know any store owner who wouldn't be, at least, disappointed to know that he has just lost $1,000 per year for the foreseeable future.
If ten other people who read this and who might have gone to that shop also stop going there, that figure could easily rise to $10,000.
I don't know about you but I would be pretty pissed off to know that I had lost that much money.