You're blowing this out of proportion with talk of "breaking the law". You need to read and understand regulations in their entirety. AA will undoubtedly claim that the mechanical situation was out of their control (section 18), and 18.1(2) stipulates that they have to refund you the fare difference if they re-book you in a lower class. So as long as they compensate you for re-booking in the lower class of service, they haven't broken any law. They should have re-booked you in J on AC, but calling it "breaking the law" is melodramatic.

This has been a problem long before APPR. American's own tariff/CoC very clearly requires them to re-book you on another airline in the same class of service. Yet I've been told by a bunch of AA agents that they NEVER re-book in J/F on other carriers, and that that's company policy. My only success in getting past this attitude has been to cite the relevant rule in the tariff, and even then, it has required a supervisor to get it done. It seems to me that despite what American's own contracts with its customers and applicable laws/regulations require, front-line agents are trained to not re-book in J/F on other carriers. (Garbage like this is why I try to avoid flying AA - none of AC, UA, or DL agents have ever batted an eye at re-booking me in the same cabin on other carriers).

As for why an employee would be reluctant to give you what you paid for, despite money not coming out of their pockets, this is a ludicrous assertion. That's true of virtually every good or service provided by a corporation. Why should a grocery store clerk make you pay for your food? They didn't buy the food. Why shouldn't a hotel employee sell you a presidential suite for the price of the cheapest room? It doesn't come out of their pocket. Companies have policies and procedures. Employees are trained to follow them, and those who fail to do so could be subject to disciplinary action, including losing their jobs. If AA's scummy management has told employees not to re-book passengers in J/F on other carriers, what else do you expect them to do?

I don't know whether stiffer penalties would fix this situation. Airlines seem to consistently blame everything on safety to avoid compensating anyone for anything. If everything can be dismissed as "safety", the size of the penalty is irrelevant since it will never be paid. A law that didn't have a Cat 797-sized hole in it would be far more effective, as would a regulator or other enforcement mechanism that actually forced the airlines to comply with the regulation.