Leaving aside the legal arguments, at least one other chain (SPG) has started charging no-shows on award rooms in points.
That seems like a much more fair policy; the whole point of a no-show fee is to compensate the hotel for the loss of the revenue they expected for the night. If they expected to be reimbursed for a points stay (said reimbursement generally being much less than BAR) it isn't reasonable for them to expect to be compensated rack rate.