If they wanted to stop the so-called fraudulent usage of the pass, they could have just asked. He cancelled so many flights because he thought that was allowed. If they told the guy he would lose his lifetime pass if he kept cancelling or no-showing, he would have stopped.
AA didn't give him a single warning. He always booked through an human agent, so they had plenty of opportunities. Instead they let him through airport security, and took his lifetime pass at the gate leaving him without his luggage.
This was clearly the act of a company that had a huge liability based on a one-sided contract that was easy for them to break out of. The only question is whether it was worth the PR hit, but it doesn't seem like the blowback has been that bad so far.