I don't believe it is piracy, as I have not upgraded my iPod touch to OS 3.x (it is the upgrade you are paying for, keeping all previous settings and files while having the device updated to the latest OS).
What I did was quite different: I performed a factory reset, essentially reverting the device to how it was when I bought it, and then installed the latest available OS for it. You pay the US$10/GB£6 to upgrade your device and the key word here is upgrade-- it keeps everything you have on it when upgrading to the new software.
The free and totally legal factory-reset option and installing the new OS essentially makes it the same as one you could have bought today that came with OS 3.0 pre-installed. The upgrade cost is simply to allow people who don't want to start again from having to re-install everything. Those of us willing to start again from a clean slate can legally re-flash their device with OS 3.0 and take it from there.
I haven't read the licence agreement in full, but I believe what I did was totally legal as the charge for the upgrade was essentially because it was an "upgrade", and they used some stupid law to justify charging for it. By wiping everything from the device and starting again with the new OS, it is not an upgrade but simply starting again with the hardware I paid for and the freely obtainable software on the Apple site. Make no mistake, the OS 3.0 files are there for anyone to install who needs them on any generation iTouch or iPhone.
Because I did not upgrade my iTouch (which is what you pay for), instead I simply performed a factory-reset to what it now comes with, what I did is totally legal. It was the whole upgrade thing that was the reason they charged for it, but I haven't upgraded my iTouch, instead I reset it to a condition that a new device with OS 3.0 would be in.
Yes it would have saved some time to upgrade, but rather like with my PC, there are advantages to starting from a clean slate, quite apart from the few dollars saved on the upgrade cost.