All of this sounds legal, so on what basis did they get them shut down?

I haven't looked at any court documents, but the WSJ article from Wednesday reported that "Last year, Google sued the anonymous operators of a network of more than 10 million internet-connected televisions, tablets and projectors, saying they had secretly pre-installed residential proxy software on them... an Ipidea spokeswoman acknowledged in an email that the company and its partners had engaged in “relatively aggressive market expansion strategies” and “conducted promotional activities in inappropriate venues (e.g., hacker forums)...”"

There was also a botnet, Kimwolf, that apparently leveraged an exploit to use the residential proxy service, so it may be related to Ipidea not shutting them down.