We then got numerous people complaining that we, a bunch of unpaid moderators, didn't try to fight back. I recall one person saying we were "too chicken" to stand up for ourselves against a major US government agency.

If we had stood up for ourselves, the agency would have gone straight to reddit and filed a DMCA (as would be entirely within their right to do in that case), and reddit, inc. would instantly have removed the content (as hosting providers nearly always do, even if there's no grounds for a DMCA takedown[1].) Why are unpaid moderators held to a higher standard than the website itself?

[0]: "three-letter agency"

[1]: yes, this is wrong, but it's how it usually goes when false DMCAs are filed.