It's definitely in response to some territorial disputes where the US doesn't want to make a definitive statement, notably the Middle East and Taiwan. This was in the news lately:
http://www.latimes.com/news/nationwo...,4151921.story

In reaction to the State Department policy of allowing just a city name, Congress passed a law in 2002 saying that passports of people born in Jerusalem can have "Israel" on their passports, but the Bush and Obama administrations have refused to do it saying it infringed on the executive's right to set foreign policy.

All the current ruling did was grant that the person had grounds to sue, and that the case could go forward.

(Do the moderators a favor: if you have an opinion on whether this is right or wrong, start a thread in OMNI as that's where it will end up anyway.)