Thanks to everyone who replied to my question.
My friends cancelled (on their own) the first leg of the cruise.
This was a learning experience for sure. My initial thoughts were wrong. There is no doubt that doing this is a violation of the PVSA.
Also I have discovered that various cruise lines handle this in different ways (as Kuki notes above). HAL, X, CCL do it differently..that's one reason we have so many different answers. I am very confident in what would have happened and if I didn't have a conflict would consider booking this myself just to personally confirm. Thanks to those that sent personal proof, I know you do not want to draw undo attention to this situation.
I think if we could eliminate the 'coastwise' options of the PSVA it would open up many more cruising options on the west coast. It can be done, the 'Coastwise Laws' are already separated from the rest of the act.