Courts decide issues based on the arguments the parties make, not the arguments they should have made. If you think about this decision in the context of the filings before the court, the decision makes sense.
Klein's complaint was a disaster. He sued Denims for copyright infringement knowing her defense would be fair use. The correct strategic choice would be to minimize any contribution by Denims, only briefly noting only that she made occasional comments that added nothing. Instead, Klein spent several pages complaining about the
content of Denims' commentary. In one section, he makes the asinine argument that Denims' commentary should not be protected because it is
misinformation. This is a David Stebbins argument with better grammar.
[Denims'] statements are [often] refuted by the cited source itself. Such misinformation fails to serve “copyright’s goal of enriching public knowledge.” To the contrary, such misinformation diminishes it.
Similarly, the correct strategic choice would be to claim audience overlap, such that it was plausible that somebody watching Denims would have watched Ethan but for her reaction stream. Klein spent pages upon pages explaining that Denims' audience hated H3 and there was no overlap.
It is true that Klein averred that Denims held a "watch party" and her commentary was not transformative, but these are conclusory statements that judges give no weight to. The factual allegations from Ethan's own complaint about Denims' stream and her audience weigh against these conclusions. The Court cited to Ethan's complaint extensively in the decision, explaining as much.
This is the same issue that Akilah Hughes had when she sued Carl Benjamin (Sargon of Akaad). She made conclusory statements about Benjamin's video being non-transformative. She then spent the majority of the complaint explaining that Benjamin's video was spreading hate against her and that they had completely different audiences.