I think, what could be called illegal is Content ID being used to actually block public domain content from being used on such terms. Restricting monitarization of said content to the point of becoming exclusive to a single party pretty much comes down to granting copyright. Especially, if this includes monetarization of unique work and effort that has gone into providing the publication of said content (e.g., digitizing from original material, editorial work, etc.)
YouTube is free to set terms for monetization contracts, including granting attribution to third parties under their system. It is not fair, but it is not illegal under any stretch of the imagination. Public domain works have zero copyright protection by definition; there is not a legal status assigned like with copyrighted works.
That said, third party Content ID claims for works not exclusively owned by the claimant are against YouTube's partner terms. The enforcement is just lacking.
> YouTube is free to set terms for monetization contracts, including granting attribution to third parties under their system.
This is obviously not the case. This is really the entire point of having Content ID in the first place: Had YT been free to monetize under their own contracts whoever uploaded an episode of Sponge Bob, Viacom wouldn't have had a case.
I think the argument was about things that are in the public domain. It's not illegal for Youtube to give the revenue from those contents to some random 3rd party.
