This case presents a bizarre confluence of elements that have caused courts and commentators to go all over the board with it: you have a copyright on the 1909 book that has long since expired, you have a 1939 film that remains under copyright, you have publicity stills from the 1939 film that depict characters from the film and that are not under copyright, and you have an alleged infringer who crops the images from the public domain publicity stills and puts them on t-shirts along with tag lines from the copyrighted movie ("there's no place like home") and sells them for commercial gain.

The holding here states that the qualities of the characters as distinctively depicted in the 1939 movie are in themselves protected by copyright even though the original characters as depicted in the book are not.

You are correct that this, then, is the "crux of the case" and this is indeed a dispute about what is or in not in the public domain rather than one about a literal taking back of elements of the public domain. Nonetheless, the practical effect of the ruling is to make it hazardous to use public domain characters from older works of literature in new films if such characters have previously been depicted in any film that remains under copyright (which obviously limits what one can do with certain public domain materials on penalty of being sued for infringement).