Downline revalidation basically means that you must be re-validated in "I" space on your FRA-IAD flight when you attempt to change the MAD-FRA flight to "I". Since "I" is not available on FRA-IAD you cannot be revalidated and, therefore, you cannot change your ticket. In effect, UA has to rebook your ticket for both segments in "I" but can't pull inventory that doesn't exist, even if you are already booked in it.
United allows you to pay the miles for "I" class and waitlist for the business cabin if you are booked in coach only on United flights. This does not work for partners. Therefore, when you booked your flight you accepted the fact that you were in coach on MAD-FRA. To change it requires "I" class all the way through.
BTW, the agent not seeing "I" space on MAD-IAD is a result of married segment logic. However, married segment logic does not apply in this case here for your needs. "I" space is open MAD-FRA (according to the OP) so the agent could book just that leg if that's all you wanted. However, since "I" is not open all the way to IAD they cannot rebook your ticket as explained above.
-RM