That's why Nintendo usually tries to avoid going to court for emulators unlike when they sued for the R4 cartridge for example, they are afraid of the result.
In the past, Nintendo tried using their trademark as a watchdog -- the console would reboot if the game did not display it at startup -- then sued unlicensed games for trademark violation. The courts ruled the trademark was purely functional in that use case, and not a trademark, then ruled against Nintendo.
I imagine a similar ruling, if the defense is: The user has a valid key, and a copy of the media. Any circumvention happened before that point in time. We're simply building a compatible device.
Of course, I'm not a lawyer, and the DMCA is a terribly designed law.
That was Sega v Accolade [1]. Although Nintendo also uses boot time trademarks, I don't think they sued over them.
It also wasn't protecting the games from being copied. It was protecting Nintendo (actually Sega) from competition from other people making their own games. The Nintendo Game Boy uses the same technique.
This is not true, Switch emulators can also run unencrypted games / programs if you provide one.
Games are usually shared encrypted, that's true, but that's just a custom, not something required by the emulator.