The judge hasn't lost his mind, he is just point out what the law says.
When you register a trademark, and those rights are granted (it isn't automatic) you don't get all-exclusive rights to use mark for anything you want. Your rights are limited to the area of trade to which you were granted the rights.
So The Register can have rights on "Register" for publishing, someone else can have rights to "Register" for point of sale systems, someone else can have rights to "Register" for a heating system, and someone could even make a car and call it the "Register". All are different areas of trade, and none of the trademarks are in conflict with each other, as long as they stay within their areas of trade. ALL of them have rights to register and use a domain name containing their common mark.
So Apple Computer can have a mark on Apple, and Apple Records can have a mark on Apple, and there is no problem. When both entered the music publishing business, however, there became a problem - and Steve Jobs lost because he didn't have rights to use "apple" to distribute music.
When a trademark holder uses the trademark beyond their granted area of trade, they are diluting their mark. If they dilute their mark, they can have their mark invalidated. A smart trademark owner amends his filing before entering an additional area of trade so that doesn't happen.
Petronas aparently doesn't have any rights to the name when it comes to pornography. In claiming rights, the judge found that Petronas was doing so falsely, and in doing so was diluting their mark.
This wasn't so much about saying that GoDaddy could go after Petronas, as much as it was a a slap against Petronas and their legal counsil for even filing the suite. Basicly telling Petronas that they don't have a leg to stand on, and that if they keep wasting everyones time that they may loose a lot more than some minorl legal fees.