If I'm digg, I see the DiggBar as a huge success, even despite the backlash from content producers and SEOs. I don't use digg often, but when I do the DiggBar improves my overall experience.
I'm assuming from your statements you are of the camp who thinks digg was trying to "steal" content, hoping the DiggBar pages would outrank the original pieces in Google. I'm also guessing you don't like digg in general, and are quick to criticize anything the company does. Please correct me if I am wrong.
I don't see the DiggBar as unethical, or even unusual. Google's image search also frames the source website in iFrames, so where are the pitchforks?
Personally, I think the DiggBar is a smart feature, and it seems to be overwhelmingly popular with their users. I think we can all agree that the execution was initially botched from a technical standpoint, but I don't think it was intentional. Digg made a strong effort to keep the DiggBar pages out of Google - they used the no-index meta tag, and the brand new RelCan tag. This should have worked, but Google's algorithm ignored these tags, presumably because of the enormous authority of the digg.com domain. This is the first case I've ever seen where no-index tags were ignored en masse.
Bottom line, digg pushed out a popular new feature in a rapidly developing space. It had nuanced technical issues which have been addressed, because the digg staff took the community's concerns seriously. I'm impressed when I see a company take positive steps in response to criticism, and if that puts me in the minority, so be it.
A final thought for those who seem so quick to demonize digg:
"Never attribute to malice that which can be adequately explained by stupidity."
Google Images you say? Well it's blocked from all search engines by robots.txt so there is no chance of search engine tomfoolery (not to mention that frames make sense in image search since you are looking for only a tiny bit of what could be a huge page). Digg said they hired a consultant and checked with Google how to do things right... They lied. If they had done either they would have heard exactly what the mob told them the minute they launched Diggbar. Just say you fucked up, don't try and bullshit that you did your very best to be on the up and up.
Sure, it's a handy feature... For SIGNED IN Digg users who want it. It's a ridiculous "feature" for the internet public. To try and pass it off as a URL shortener was an even more terrible idea. Have your land grab, but don't try and call it a service for John Q Surfer.
Bottom line, Digg pushed out a feature made instantly popular because they opted everyone in, that made many people question the integrity of a company previously given the benefit of the doubt. Because they now let don't opt-in non members is not so great, it unquestionably should have been that way to start. reddit has a similar feature but you have to opt-in. That's great and if they really wanted this to be a feature and not a land grab that's what they would have done.